A closely watched Federal Reserve indicator released on Friday showed inflation rising roughly in line with expectations in April, leaving markets nervous about when interest rates might start to fall.
The Commerce Department reported that the personal consumption expenditures price index, which excludes food and energy costs, rose just 0.2 percent over the same period, in line with Dow Jones expectations.
Year-on-year, core PCE rose 2.8%, 0.1 percentage point above expectations.
PCE inflation, which includes the volatile food and energy categories, rose 2.7% year-on-year and 0.3% month-on-month, both of which were in line with expectations.
Federal Reserve officials prefer the PCE reading to the Labor Department’s Consumer Price Index, which takes into account changes in consumer behavior such as substituting cheaper items for more expensive ones and has a broader scope than the CPI.
“The core index was up 2.8%, which is good, but it’s been trading in a range for five months, which to me is pretty solid,” said Dan North, senior North American economist at Allianz Trade. [Fed Chair Jerome] Powell, I’d love to see it start to go down, but it’s just barely creeping down. … I haven’t reached for the Pepto yet, but I’m not feeling great. This is not something you guys want to see.”
A 1.2% increase in energy prices helped lift the overall increase. Food prices fell 0.2% from the previous month.
Goods prices rose 0.2% and services prices increased 0.3%, continuing the normalization trend with services and consumption providing much of the fuel for the economy.
Friday’s release included data on income and spending, along with the inflation rate.
Personal income increased 0.3% from the previous month, in line with expectations, but spending rose just 0.2%, below expectations of a 0.4% increase and down from a downwardly revised 0.7% increase in March. Adjusted for inflation, spending fell 0.1%, mainly due to a 0.4% decrease in spending on goods and a slight 0.1% increase in spending on services.
Market reaction after the announcement was that futures linked to major stock indexes rose and government bond yields fell.
“The PCE price index didn’t signal much of an improvement in inflation, but it didn’t signal a setback either, and based on the initial reaction in stock index futures, the market will likely view this as mostly positive,” said Chris Larkin, managing director of trading and investing at Morgan Stanley’s E*Trade division.
“But investors need to be patient,” he added. “The Fed has signaled it needs more than a month of favorable data to confirm that inflation is credibly declining, and there is still no reason to think the first rate cuts will come any sooner than September.”
The stronger-than-expected inflation data has led central bankers to tread cautiously, meaning they are unlikely to cut interest rates anytime soon.
More recently, New York Fed President John Williams said Thursday that while he is confident inflation will continue to fall, prices remain too high and not enough progress is being made toward meeting the Fed’s 2 percent annual target.
Markets are keeping expectations of rate cuts this year in check, with pricing on Friday morning suggesting the first moves likely won’t come until the Fed’s November meeting, which ends two days after the presidential election.
