PPI Revision Confirms Sticky Service Inflation: Core PCE Forecast Rises to 0.27%

Core Conclusion

The March core PCE forecast has been revised upward to 0.27% month-over-month from 0.26%, driven entirely by stronger-than-expected health services and airfares after the PPI release. This small revision carries a larger message: service-sector inflation persistence, particularly in categories with sluggish pass-through from input costs, remains a structural headwind for disinflation. The revised forecast implies April year-over-year core PCE of 3.28%, up from March's 3.20%, and annualized three-month and six-month rates of 3.77% and 3.78% respectively—still well above the Fed’s target.

What the Market May Be Underpricing

The market likely underestimates the stickiness of services inflation, especially in healthcare and air travel. PPI’s pass-through to PCE in these categories is consistently wider than many models assume. Additionally, the import price data scheduled for May 14 represents a one-sided risk—while historically PPI drives most of the revision, any upside surprise in import prices would push core PCE even higher. The current 0.27% forecast may prove conservative.

Evidence Chain

1. PPI data directly drove the 0.01pp upward revision

• Core PCE month-over-month forecast increased from 0.26% to 0.27% after incorporating PPI.
• Health services contributed +0.01pp; airfares contributed +0.01pp. These two categories account for the full revision.
• Headline PCE remained at 0.43% month-over-month, unchanged, as energy and food components were already well estimated.

2. Underlying annualized rates confirm elevated inflation momentum

• Three-month annualized core PCE: 3.77% (April) vs. 4.43% (March). The decline is only 0.66pp and still above 3.5%.
• Six-month annualized: 3.78% (April) vs. 3.70% (March)—actually rising slightly.
• Year-over-year rose to 3.28% from 3.20%, indicating no meaningful deceleration.

3. PPI historically dominates PCE revisions; import prices unlikely to change the picture

• PPI is the primary source of revisions in core PCE, as PCE services prices are often derived from PPI inputs.
• The import price release tomorrow is expected to contribute negligible changes based on historical patterns.
• However, if import prices (especially for core goods inputs) print above consensus, it could lift core goods component and add another 0.01-0.02pp.

Key Divergences and Risks

• Energy volatility: March energy month-over-month surged 11.56%. April's 3.84% forecast still implies volatility that can distort headline and affect core through secondary effects on transportation.
• Housing services jump: Housing month-over-month accelerated from 0.27% in March to 0.52% in April. If sustained, this would add persistent upward pressure to core services ex-housing (forecast at only 0.16% month-over-month).
• Import price upside: The May 14 release is a low-probability but high-impact risk. PPI already captured domestic producer prices, but imported consumer goods not fully reflected could push core PCE higher.

Valuation or Trade Implications

A 0.01pp revision alone is not a market-moving event, but the persistence of core PCE above 3.2% year-over-year and annualized rates near 3.8% reinforces the case for the Fed to hold rates unchanged through at least the next meeting. Short-term rate expectations should edge higher modestly, and the UST yield curve is likely to steepen further as long-end term premium adjusts for sticky inflation. Investors should maintain a cautious stance on duration and consider positioning for further upward pressure on breakeven inflation rates.

Appendix: Key Forecast Metrics Summary