Key Fed inflation measure rose 2.8%

Key Fed inflation measure rose 2.8%

Inflation showed little sign of abating in March, with a key barometer closely watched by the Federal Reserve showing price pressures remaining elevated.

The price index of personal consumption expenditures excluding food and energy rose 2.8% in March from a year earlier, the same as in February, the Commerce Department reported Friday. That was above the Dow Jones consensus estimate of 2.7%.

Including food and energy, the PCE price indicator for all items rose 2.7%, compared to the estimate of 2.6%.

On a monthly basis, both metrics rose by 0.3% as expected, matching February’s increase.

Markets had little reaction to the data and Wall Street was expected to open higher. Treasury yields fell, with the benchmark 10-year note at 4.67%, down about 0.4 percentage points over the session. Futures traders became slightly more bullish on two possible interest rate cuts this year, increasing the probability to 44%, according to CME Group’s FedWatch Indicator.

“The inflation reports released this morning were not as high as feared, but investors should not get too caught up in the idea that inflation has fully healed and the Fed will cut interest rates in the near future,” said George Mateyo, Fed chief Investment Officer at Key Wealth. “The prospects for rate cuts remain, but they are not assured, and the Fed will likely need weakness in the labor market before it has the confidence to cut.”

Consumers showed that they continue to spend money despite the increased price levels. Personal spending rose 0.8% month-over-month, topping the 0.7% estimate although it was the same as February. Personal income rose 0.5%, in line with expectations and above last month’s 0.3% increase.

The personal savings rate fell to 3.2%, down 0.4 percentage points from February and two full percentage points from a year ago, as households dipped into savings to maintain spending.

The report follows bad inflation news on Thursday and likely requires the Fed to maintain its interest rate line at least through the summer unless there is a material change in the data. The Commerce Department reported Thursday that PCE accelerated 3.4% annualized in the first quarter, while gross domestic product rose just 1.6%, well below Wall Street expectations.

With inflation still rising two years after it began its first rise to its highest level in more than 40 years, central bank policymakers are watching the data even more closely as they consider the next steps in monetary policy.

The Fed is targeting inflation at 2%, a level that the core PCE has been above for three years.

The Fed particularly watches the PCE because it adjusts to changes in consumer behavior and places less weight on housing costs than the Labor Department’s more widely used consumer price index.

While they monitor both headline and core metrics, Fed officials believe the index excluding food and energy provides better insight into longer-term trends because those two categories tend to be more volatile.

Prices for services rose 0.4% month-on-month, while prices for goods rose 0.1%. This reflects a rise in consumer prices as goods inflation has dominated since the early days of the Covid pandemic. Food prices fell 0.1% month-on-month, while energy prices rose 1.2%.

On a 12-month basis, prices for services are up 4%, while goods have barely moved, rising just 0.1%. Food rose 1.5% while energy rose 2.6%.

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2024-04-26 14:20:00