The latest data from the Commerce Department shows that inflation remains elevated, with the personal consumption expenditures price index excluding food and energy increasing 2.8% from a year ago in March. This was in line with the previous month’s figure and above expectations. Including food and energy, the all-items PCE price gauge increased 2.7%, also slightly exceeding estimates. Despite these numbers, the markets reacted calmly, with Wall Street set to open higher and Treasury yields falling. Futures traders are slightly more optimistic about potential rate cuts this year, with the probability raised to 44%.
Chief Investment Officer George Mateyo pointed out that while the inflation reports were not as hot as feared, investors should not assume that inflation has been completely cured. Rate cuts from the Fed are still possible, but not guaranteed, and would likely require weakness in the labor market before being implemented. Consumers continue to spend, with personal spending rising 0.8% on the month and personal income increasing 0.5%. However, the personal savings rate fell to 3.2%, down significantly from a year ago as households dipped into savings to maintain spending levels.
The latest report follows bad news on inflation from Thursday, which may prompt the Fed to hold interest rates steady at least through the summer unless there is a substantial change in the data. The Fed targets 2% inflation, a level that core PCE has exceeded for the past three years. The Fed watches PCE particularly closely due to its adjustments for changes in consumer behavior and its focus on longer-run trends. Services prices increased 0.4% on the month, while goods were up 0.1%, marking a shift from goods inflation dominance seen earlier in the Covid pandemic.
Central bank policymakers are closely monitoring inflation data, with core PCE remaining elevated two years after starting its ascent to the highest level in over 40 years. Fed officials believe the ex-food and energy figure provides a better look at longer-term trends. Services prices are up 4% on a 12-month basis, while goods have barely moved. Food prices declined 0.1% on the month, but energy rose 1.2%. Inflation remains a key factor shaping the Fed’s future monetary policy decisions.
It is important to stay updated on this breaking news regarding inflation and the Fed’s response to current economic conditions. Keep checking back for the latest updates and market developments as the situation continues to evolve. Stay informed and be prepared for potential changes in monetary policy based on future data releases and economic indicators.
