The Fed's preferred measure of inflation is expected to show very slow progress on Friday

Inflation is taking small steps toward getting back to where policymakers want it to be, and a report due on Friday is expected to show more of that creeping progress.

The Commerce Department's measure of personal consumption expenditures prices is expected to show inflation in April will reach an annual rate of 2.7%, according to Dow Jones estimates for both overall and “core” inflation that excludes food and energy costs.

If these forecasts hold true, it would represent a small decline in the underlying measure and little change in the overall rate, although economists will look at annual and monthly measures. Core inflation is expected to slow to 0.2%, representing at least some additional progress towards easing price pressure on weary consumers.

Overall, the report, scheduled for release at 8:30 a.m. ET, will likely signal another incremental move toward the Fed's 2% target.

“We don't expect any big surprises up or down in the PCE index on Friday, as most of the latest economic data points to an economy that has settled into a gentle, long-term boil of not too hot and not too cold,” Carol Schleif said. Chief Investment Officer at BMO Family Office. “However, reaching the Fed's 2% target could be a bumpy landing.”

Dealing with inflation has proven difficult these days.

The Fed analyzes the data in several ways, most recently introducing what is known as the “super core” level, which looks at the costs of services excluding food, energy and housing as a way to measure longer-term trends.

However, policymakers' expectations that housing inflation this year would be largely subdued, exacerbating the debate on the matter.

Furthermore, the Fed's preference for personal consumption expenditures is a bit ambiguous, as the general public is more focused on the Labor Department's Consumer Price Index, which has shown much higher trends. CPI inflation was 3.4% for all items in April and 3.6% for the core measure, well above the Fed's target.

The Fed prefers measuring personal consumption expenditures because it takes into account shifts in consumer behavior, such as when shoppers replace less expensive items with more expensive ones. The theory is that the methodology provides a better look at the actual cost of living rather than just absolute prices. Fed officials place particular emphasis on fundamentals because they serve as a better indicator of the long term.

The Commerce Department provided some good news Thursday — again, in modest terms — when it reported that first-quarter personal consumption expenditures rose 3.3% on a headline level and 3.6% on an underlying basis, both 0.1 percentage points lower than the initial estimate. Likewise, the “chain-weighted” price index stood at 3%, also 0.1 percentage points lower than the first reading.

However, these numbers are still a long way from the Fed's target. Markets have been sensitive to inflation movements, particularly in relation to how they reflect the central bank's intentions regarding interest rates. Current expectations are for just one rate cut this year, likely in November, according to CME Futures Pricing Group's FedWatch gauge.

Matthew Ryan, head of market strategy at global financial services firm Ebury, said: “Economists are optimistically anticipating a lower monthly CPI reading in this report, and any disappointment may prompt markets to consider further the prospects of any cuts in 2024.”

New York Fed President John Williams, part of the central bank's leadership troika that also includes Chairman Jerome Powell and Vice Chairman Philip Jefferson, said Thursday that he expects personal consumption expenditures inflation to continue to decline, falling to about 2.5% by End of year. Before eventually reaching 2% in 2026.

“We have a lot of dynamic supply and increased productivity in the economy. That's how I know what's going on,” Williams said. “It's always a big question mark about how this will evolve in the future.”