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PRIMER - US PCE inflation data for March is due at 13:30BST/08:30EDT

The upcoming PCE inflation data for March is critical as it could signal the Fed's path on interest rates.

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PRIMER - US PCE inflation data for March is due at 13:30BST/08:30EDT

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  • EXPECTATIONS: PCE prices are seen rising by 0.6% M/M in March (prev. 0.4%), with the annual rate at 3.5% Y/Y (prev. 2.8%); the core measure is seen at 0.3% M/M (prev. 0.4%), while the annual core rate is seen rising to 3.2% Y/Y (prev. 3.0%). At his post-meeting press conference on Wednesday, Fed Chair Powell said that he sees PCE at 3.5% Y/Y in March, and sees core PCE at 3.2% Y/Y, backing the consensus view. 
  • CPI/PPI: The recent CPI data, with headline inflation at 3.3% Y/Y and core at 2.6% Y/Y in March, alongside PPI, where headline inflation was 4.0% Y/Y and core was 3.8%, showed that energy was the main driver of the headline CPI jump. Core CPI offered some relief, but PPI components that feed into PCE, including airfares, healthcare and portfolio management, suggest services inflation remains sticky. Citiʼs analysts said core PCE inflation has been stuck around 3.0% Y/Y, while core CPI has eased a little more, to around 2.5-2.6% Y/Y. “Headline inflation will likely continue to be strong in the near term as energy prices have remained elevated,” the bank wrote, adding that it does “not expect much passthrough of higher energy prices to core inflation, but with upside risks to our forecasts for components like goods prices.” 
  • POLICY IMPLICATIONS: In terms of policy implications, analysts say a firmer core print would strengthen the higher-for-longer rates narrative and reduce conviction in near-term cuts. A softer core reading would help revive the disinflation story, but probably only at the margin, given the recent signs of persistent price pressure and the Fedʼs cautious, data-dependent stance. Citi also noted that “the Fed and markets remain focused on medium- and longer-term inflation expectations that have stayed anchored,” and said it expects more benign monthly core inflation readings in the summer and Autumn.
Context

Expectations are for a notable rise in both headline and core measures, which could reinforce the narrative of maintaining higher rates for longer. Conversely, a softer core reading may revive hopes for disinflation, but given the persistence of inflationary pressures, any impact on rate expectations is likely to be modest.

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