Fed’s Preferred Inflation Gauge Exceeds Expectations, Indicating Hindered Progress in Price Stability

The Federal Reserve’s preferred inflation gauge, the personal consumption expenditure (PCE) price index, has exceeded expectations, indicating a struggle to achieve price stability. In March, the PCE price index rose to 2.7 percent, surpassing the consensus estimate of 2.6 percent. This highlights the ongoing challenge of returning inflation to the central bank’s 2 percent target.

The core PCE, which excludes volatile energy and food sectors, remained unchanged at 2.8 percent year-over-year. On a monthly basis, core PCE increased by 0.3 percent. These figures exceeded economists’ expectations and suggest that inflation pressures are not solely demand-driven but also cost-driven.

Looking ahead, the consumer price index (CPI) is expected to remain unchanged at 3.5 percent. The CPI is projected to rise by 0.4 percent monthly. This indicates that inflationary pressures may continue in the near future.

Additional data from the Bureau of Economic Analysis (BEA) showed that personal spending in March soared by 0.8 percent, matching the February reading. Personal income also rose by 0.5 percent, in line with market expectations. However, the personal savings rate declined to 3.2 percent from 3.6 percent.

The market reaction to the PCE figures was positive, with U.S. stocks rallying and benchmark indexes increasing by as much as 1.3 percent. Treasury yields declined across the board, and the U.S. Dollar Index (DXY) maintained its gains.

The strong PCE print suggests that there will be no rate cuts in the short term, according to Giuseppe Sette, the co-founder and president of Toggle AI. Inflation pressures have shifted from being demand-driven to cost-driven, with factors such as home insurance, commodities, and high fed funds rates contributing to higher costs for businesses and families.

However, this second wave of inflation may be short-lived as consumers have depleted their pandemic-era savings. As the savings rate normalizes, consumer spending is expected to decrease.

The first-quarter GDP report revealed slower growth and rising inflation. The economy grew by 1.6 percent in the first quarter, down from 3.4 percent in the previous quarter. The GDP Price Index increased to 3.1 percent, while PCE prices climbed to 3.4 percent and core PCE surged to 3.7 percent.

Investors have not priced in a rate hike this year, but expectations for a rate cut have been reduced. The futures market now only anticipates one quarter-point rate cut in December.

Many monetary policymakers have acknowledged that progress on inflation has stalled, and there is little urgency to cut the federal funds rate. Stagflation talk has emerged, with concerns about stagnant growth and high inflation. Treasury Secretary Janet Yellen believes that inflation is on a downward path and that housing is the main contributor to inflation.

The next meeting of the Federal Open Market Committee will take place on April 30 and May 1, where policymakers will discuss the current inflationary pressures and the path forward for interest rates.