April PCE inflation comes in at 2.1%, nearing Fed goal

The Federal Reserve’s preferred measure of inflation continued to inch toward its 2% target last month, but the impact of higher tariffs have yet to reflect meaningfully in government data.

The headline Personal Consumption Expenditure, or PCE, index increased 2.1% on an annualized basis in April, according to a report released by the Bureau of Economic Analysis on Friday morning, down from the 2.3% year-over-year increase registered in March. 

Core PCE inflation, which factors out food and energy prices, came in at 2.5%, down from 2.6% the month prior. Both readings were in line with Wall Street expectations and matched the trajectory of the other key government price measure, the Consumer Price Index, which was released two weeks ago. 

The PCE report supports recent assertions by Fed officials that inflation continues to trend in the right direction and the underlying economy remains solid, but it leaves open the biggest question for the Federal Open Market Committee — how the Trump administration’s trade policies will impact the economy. 

“If the increases in tariffs announced so far are sustained, they are likely to interrupt progress on disinflation and generate at least a temporary rise in inflation,” Fed Vice Chair Philip Jefferson said earlier this month. “Whether tariffs create persistent upward pressure on inflation will depend on how trade policy is implemented, the pass-through to consumer prices, the reaction of supply chains, and the performance of the economy.”

During their last meeting on May 6 and 7, FOMC participants expressed a range of views about how tariffs might impact employment and prices, with some expecting the shock to be transitory while others worried about the ramifications of prolonged supply-chain disruptions.

“Potential disruptions to supply chains and distribution networks are particularly acute for small businesses, which are less diversified, less able to access credit, and hence more vulnerable to adverse shocks,” Fed Gov. Michael Barr said on May 15.

Since then, the U.S. has announced a trade deal with the U.K. and negotiated a temporary detente in its trade war with China. Then, this week, the U.S. Court of International Trade blocked President Donald Trump’s use of worldwide and retaliatory tariffs, finding that the executive does not have the express power to impose such restrictions. 

An appeals court then put that ruling on hold, allowing the tariffs to be imposed while the White House challenges the trade court’s decision. 

Should the trade court’s ruling be upheld, many of the most restrictive levies rolled out by the White House last month could be nullified, an outcome that could put the Fed back on track to cut rates sooner rather than later.

During a Thursday morning appearance at the economic conference in Michigan, Federal Reserve Bank of Chicago President Austan Goolsbee said if the ultra-high tariffs announced in April do not come to pass — either because of the court ruling or some series of negotiations — the underlying course of the economy and inflation could enable the Fed to resume the monetary easing campaign that was put on hold in January.

Even if the tariffs do not go away entirely but instead remain around 10% — significantly higher than the overall average of less than 3% before the April rollout but well below the more than the 20% levy originally proposed — some on the Fed are confident the economy would be able to absorb the higher costs with minimal disruptions.

“I’m much more optimistic now than I was a month ago that we are going to be able to get a decent … average tariff across the world,” Fed Gov. Christopher Waller said earlier this month. “Once Secretary [Scott] Bessent took over, started cutting these deals — it sounds like there’s a lot more on the table — that’s all good news for the economy.”