The US Federal Reserve's preferred measure of inflation accelerated to its highest level in nearly three years in April, complicating the path to a rate cut as policymakers approach next month's decision. The headline personal consumption expenditures (PCE) price index rose 0.4% on the month and 3.8% on the year, up from 3.5% in March and the highest annual reading since May 2023. Core PCE, which strips out food and energy and is the gauge the Federal Reserve watches most closely, edged up to 3.3% on the year from 3.2%, its highest since late 2023, while rising only 0.2% on the month, slightly softer than the consensus 0.3%.
The acceleration was driven almost entirely by energy. PCE energy prices rose 17.9% on the year, the steepest annual increase since September 2022, with petrol up 28.4% and heating oil up 54.3% as the conflict in the Middle East continued to disrupt seaborne crude flows through the Strait of Hormuz. Goods prices rose 0.7% on the month, slower than March's 1.4% but still elevated, while services inflation held steady at 0.3%. The mix tells a clear story: the underlying domestic pulse is moderating, but the imported energy shock is doing the work in the headline.
For the Federal Reserve, the data leaves the same uncomfortable position it has occupied all year. The year-on-year readings are the wrong way for cuts, but the softer monthly core print is the right way. Markets continue to price a hold at the June meeting as the most likely outcome, with the first cut of the year now expected later in the third quarter. The split also showed up at the April Federal Open Market Committee meeting itself, which produced an 8 to 4 vote, the largest number of dissents since October 1992, with one Governor wanting a 25 basis point cut and three other members objecting to language suggesting an eventual return to easing.
For currency markets, the data leaves the dollar firm and keeps sterling on the back foot. GBP/USD traded around 1.3440 following the release, little changed on the day but well below the 1.35 to 1.36 levels seen earlier in the spring. With the Bank of England having held Bank Rate at 3.75% at its April meeting and the Federal Reserve showing no urgency to cut, the pair looks set to take its next direction from June's policy meetings on both sides of the Atlantic. For UK clients with a known dollar requirement before then, a forward contract remains the practical way to fix today's rate for a future settlement date.
