Fed's Favorite Inflation Gauge Slows, But Trump's China Accusation Flips Market Mood

The Federal Reserve's preferred inflation gauge showed further cooling in April, strengthening the case for a patient monetary policy stance.

While the data should have supported risk sentiment into the week's final session, Wall Street turned lower after President Donald Trump accused China of breaching a trade deal, raising fears of renewed tariffs.

PCE Inflation Shows Broad-Based Cooling

The Personal Consumption Expenditures price index, released Friday by the Bureau of Economic Analysis, rose 2.1% year-over-year in April, a deceleration from March's 2.3% and lower than consensus estimates of 2.2%.

On a monthly basis, prices increased by just 0.1%, rebounding slightly from a flat March reading but still reflecting muted inflationary pressure.

The Fed’s closely watched core PCE index—which strips out volatile food and energy prices—eased to 2.5% annually, down from 2.7% in March and aligned with expectations. On the month, core prices ticked up just 0.1%, consistent with both the prior reading and forecasts.

These figures underscore the continued disinflationary trend in the U.S. economy and suggest that the latest tariff adjustments have not yet impacted consumer price dynamics.

Income Rises Strongly, Spending Slows

In contrast to the subdued inflation data, U.S. consumers saw their incomes grow at a robust pace. Personal income surged 0.8% in April from the prior month, a stronger acceleration from March's 0.7% and well above forecasts of 0.3%.

Yet, spending growth cooled to 0.2% from 0.7% in March, matching economist estimates.

Markets Spooked By Renewed Trade War Fears

Despite the positive inflation backdrop, U.S. stock futures turned negative during Friday premarket trading after Trump posted on Truth Social that China had “totally violated” its trade agreement with the U.S., reigniting fears of escalating tariffs.

Trump claimed the previous deal was made to avoid economic collapse in China and asserted that the new breach would not go unanswered.

"We went, in effect, COLD TURKEY with China," Trump wrote. "Many factories closed and there was, to put it mildly, ‘civil unrest.'"

Futures on the S&P 500 dropped 0.4% to 5,890, while Nasdaq 100 futures fell 0.3% to 21,300.

The SPDR S&P 500 ETF Trust SPY is up 1.9% for the week.

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