The Fed's favorite inflation indicator, the PCE Price Index (PCE), will be released by the Bureau of Economic Analysis (BEA) on Thursday. The PCE differs from the better-known Consumer Price Index (CPI) as its composition changes more frequently and is quicker to reflect real-time pricing. In the last report, through March, PCE inflation reportedly increased at a 3.2% rate year over year. By comparison, the latest CPI report, through April, had overall inflation rising 3.8%. Core PCE, which excludes volatile food and energy prices, had risen at an annual rate of 3.2% in the last report. Our PCE forecasts call for slightly higher readings for April: 3.8% for the headline number and 3.3% for the core reading, driven by the fall-out from higher energy prices due to the Iran war. This trend is evident in the Producer Price Index (PPI) report: farther up the value chain, producer prices are rising at accelerated rates even approaching 20%. Expectations are changing as well: the three-year outlook for inflation is now 2.8%, versus 2.3% two months ago. Overall, inflation in this cycle peaked in summer 2022 and, prior to the war, had been on a downward trek. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 4.7% rate year over year, up 110 basis points compared to the month-ago level. Focusing on core inflation -- which we obtain by averaging core CPI, market-based PCE ex-food & energy (from the GDP report), the five-year forward inflation expectation rate, the 10-year TIPs break-even interest rate, and the PCE Price Index -- our reading is 3.0%, up 50 basis points month over month. Given inflation trends, we do not expect the Fed to implement any rate cuts over the next several quarters.

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The major indices were higher at midday Wednesday, likely benefiting from a retreat in oil prices and interest rates. The tech-heavy Nasdaq composite is providing the biggest boost as traders anticipate results from Nvidia (NVDA), the world's largest company by market cap, after the close. Meanwhile, retail earnings are pouring in. Investors will be parsing through minutes from the Fed's recent open market committee meeting to be released at 2pm.

The Fed's favorite inflation indicator, the PCE Price Index, will be released on Thursday morning. The index differs from the better-known Consumer Price Index (CPI) because its composition is changed more frequently and is quicker to reflect the impact of real-time pricing. In the most-recent report, PCE inflation reportedly increased at a 2.8% rate year over year through January. By comparison, the latest CPI report, through January had overall inflation rising 2.4%. Core PCE, which removes volatile food and energy prices, also had risen at an annual rate of 3.1%. Our PCE forecasts call for slightly lower readings for February: 2.7% for the headline number and 2.8% for the core reading. We think lingering inflation in certain sticky-priced services will combine with the skyrocketing price of oil to present a challenge for the Fed as it strives for its 2% goal. Inflation in this cycle peaked in summer 2022 and has been on a consistent downward trek since then. We track 20 inflation measures on a monthly basis. On average, they are indicating that prices are rising at a 2.68% rate year over year, up 20 basis points compared to the month-ago level. The numbers are volatile and can be distorted by swings within the Producer Price Inflation report. Focusing on core inflation, our reading is 2.54%, flat month over month. Given these inflation trends, as well as a recent slowdown in the employment environment, we still expect the Federal Reserve to reduce rates over the next several quarters, with the ultimate goal of aligning the fed funds rate to approximately 100-150 basis points above the long-term inflation rate in 2027.