The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, has increased, causing concerns about the progress made in the fight against inflation. In February, the PCE rose to 2.5 percent, up from 2.4 percent in January. This rise was in line with market expectations. The increase in energy prices, particularly oil prices, played a significant role in driving up the headline reading of the PCE. Oil prices have surged nearly 17 percent in the first three months of 2024, leading to higher gasoline prices.
Food prices, on the other hand, remained relatively unchanged, edging up by only 0.1 percent. The core PCE, which excludes the volatile food and energy components, dipped slightly to 2.8 percent but still matched the consensus estimate. Overall, goods inflation increased by 0.5 percent, while services inflation climbed by 0.3 percent.
Monetary policymakers place more weight on the PCE because it is frequently updated and takes into account consumer substitution effects. In comparison, the Consumer Price Index (CPI) is adjusted biannually and has a narrower definition of consumer expenditures.
The annualized core PCE came in well above the Fed’s target for the third time in the last nine months. On a one- and three-month annualized basis, core PCE reached 3.2 percent and 3.5 percent, respectively. The six-month annualized rate was 2.9 percent, showing a significant increase from December’s 1.9 percent and January’s 2.6 percent.
Looking ahead, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model estimates that the PCE will rise to 2.6 percent next month, while core PCE is expected to slip to 2.7 percent.
While inflation has been a concern, other economic indicators have shown mixed results. Personal income rose at a smaller-than-expected rate of 0.3 percent in March, down from 1 percent in February. However, consumer spending saw a significant surge of 0.8 percent, surpassing the consensus estimate of 0.5 percent. The personal saving rate also decreased to 3.6 percent from 4.1 percent in January.
The market reaction to these developments has been relatively muted due to the Good Friday holiday, with most U.S. financial markets closed. The U.S. dollar index dropped below 104.50, but it has been one of the top-performing currencies this year, rising more than 3 percent year-to-date.
Experts have differing opinions on the implications of the inflation data. Giuseppe Sette, the president of financial research firm Toggle AI, believes that the slow progress in the fight against inflation provides ammunition for those who doubt the Fed’s next rate cut. Others, like EJ Antoni, a Heritage Foundation economist, argue that inflation remains too high and continues to hurt families.
Inflation has been trending in the wrong direction in the first quarter of 2024. Both the CPI and the Producer Price Index (PPI) have exceeded expectations. The CPI rose to 3.2 percent, while the PPI accelerated by 0.6 percent monthly. Economists closely monitor the PPI as it is an early indicator of consumer prices.
Fed Chair Jerome Powell acknowledged the unexpected inflation data but stated that it is unclear whether this is a temporary bump or something more significant. Despite these concerns, the Fed still anticipates three rate cuts this year, with the median policy rate expected to reach 4.6 percent by the end of the year.
Investors are largely aligned with the Fed’s expectations, as the futures market signals three rate reductions starting from the June meeting.
In conclusion, while concerns about inflation persist, the recent data suggests that inflationary pressures have increased due to rising energy prices. The Federal Reserve will closely monitor these developments and make policy decisions accordingly. Investors are cautiously optimistic, aligning with the Fed’s expectations of three rate cuts this year. However, economists and market observers continue to debate the extent and implications of the current inflationary trend.
