The Federal Reserve’s preferred gauge of inflation came in at the highest level in nearly three years. However, new Fed Chair Kevin Warsh’s first inflation report also contained some good news.

The April reading of the personal consumption expenditures price index (PCE) increased 0.4% in April and 3.8% year over year.

Core PCE, which excludes food and energy, rose 0.2% in April and 3.3% year over year.

While the headline year-over-year reading came in line with estimates and remains high, the monthly gains in the PCE and core PCE were 0.1% below economists’ projections, suggesting some softness on the inflation front.

In addition to much higher energy prices, which had been expected due to the Iran war, housing and utilities costs also increased 0.6% in April, the largest monthly increase in a year.

While inflation remains well above the Fed’s 2% target, seeing the monthly numbers come in below estimates should offer some relief to investors following a hot April Consumer Price Index reading.

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The PCE vs. CPI

In terms of inflation, investors may be more familiar with the CPI, which also posted an April headline number of 3.8%, higher than expected.

Both numbers are important, but they also differ.

While both indexes track price changes across a range of consumer goods and services, the PCE is considered to have a broader scope.

For instance, the PCE includes the actual spending made by urban and rural consumers, whereas the CPI measures only spending in urban areas.

Furthermore, the CPI only measures consumers’ out-of-pocket spending, whereas the PCE also includes spending made on behalf of consumers.

The data is also collected differently. The CPI is collected through a household survey, while the PCE data is collected through different business surveys.

One key difference is that shelter prices receive roughly twice the weighting in the CPI than in the PCE, while healthcare costs receive a higher weighting in the PCE.

Lastly, the CPI tends to come in higher than the PCE. According to Morningstar, the CPI tends to run about 40 basis points (0.4%) higher than the PCE.

How will this impact the Fed’s interest rate trajectory?

If you were worried about the CPI report earlier this month, the PCE offers some reprieve to more dovish members of the Fed who don’t believe the Fed needs to raise interest rates right now.

Warsh had previously made a case for cutting interest rates in the months leading up to his confirmation as the new Fed chair, so this could help that case, although it’s hard to exactly know how Warsh will proceed.

He had expressed some concerns about inflation during Congressional testimony in April. Interestingly, federal funds rate futures don’t seem to have changed much, as of this writing.

The odds of the Fed leaving rates unchanged at its June meeting have decreased slightly from yesterday, while the odds of a rate hike have increased slightly.

That said, there is still nearly a 99% chance the Fed will leave rates unchanged at its June meeting. Keep in mind that these probabilities can change frequently.

Longer term, investors now expect the Fed to hold rates steady until March of next year, at which time they expect the Fed to hike rates by a quarter point and leave them at that level through the end of 2027.

Ultimately, I don’t think the PCE report changes a ton in terms of the trajectory of interest rates.

But it is good news in that the Fed can likely cite the April PCE as a reason to remain in a wait-and-see mode and feel less pressure to raise interest rates in the near term.