GDP growth cut and latest PCE inflation data ‘disappointing’. This is what it means for advisors

GDP growth was revised down Thursday and the latest Personal Consumption Expenditures price index data highlighted the challenges advisors and their clients continue to face around inflation and the broader economy.

First quarter real GDP increased at 1.6%, according to data released by the Bureau of Economic Analysis, although this was revised down from an advance estimate of 2%.

PCE, which is the Federal Reserve’s preferred gauge of inflation, rose 3.8% year-over-year in April, up from an annual increase of 3.5% in March. However, April’s annual rate came in below expectations – economists had expected PCE to rise 3.9% from the same period last year, according to Barron’s, citing FactSet data.

“Inflation has been rising – which is no surprise – but this morning’s GDP numbers were very disappointing, with only a 1.6% increase in the first quarter, revised much lower than the initial 2.0% reading,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management, in a note. “We are far from stagflation, but rising inflation coupled with slowing growth is the opposite of what we want in both dimensions.”

While GDP is down, the market seems indifferent - S&P 500 futures are up 0.02% on the latest data.

“The stock market will cheer the resilient consumer spending numbers, but we need to get inflation back under control and ideally do that in a way that preserves (or improves growth); for those that are counting on a rate cut in the second half of this year, they can forget it, because this kind of data makes it increasingly unlikely that we will get one in 2026 or even for all of next year,” said Northlight’s Zaccarelli.

From the prior month, PCE rose 0.4% in April, compared with March’s 0.7% increase, and below economists’ forecast of a 0.5% increase.

The Core PCE price index, which excludes food and energy, rose 0.2% in April, compared with expectations of a 0.3% increase, and 3.3% from a year ago, in line with expectations, according to Barron's.

Bret Kenwell, US Investment Analyst at eToro, notes that the consumer has remained fairly resilient, as recent earnings commentary has shown. “But the longer inflation stays elevated, the greater the risk that it eventually has a more lasting impact,” he said, in a note. “The concern now is whether higher energy prices begin to filter into non-energy categories, making inflation harder for both consumers and the Fed to look through.”

 But Kenwell also found positives in the latest PCE data. “While this morning’s inflation report may not have delivered an upside surprise, it did show the highest year-over-year reading in almost three years,” he said. “Even after stripping out energy prices, core PCE is sitting at a multi-year high. In response, the Fed has already taken on a more hawkish posturing in response to higher inflation.”

The minutes of the latest Fed meeting, released last week, raised the possibility of rate hikes amid inflationary pressures.

Last month the Federal Reserve stuck to its path of keeping its policy rate steady at 3.5% to 3.75%, despite sustained pressure from President Donald Trump to lower rates. The Fed made its last rate cut in December.