The Federal Reserve’s preferred inflation gauge surged at a higher-than-expected pace, highlighting the persistent struggle to return inflation to the central bank’s 2 percent target.
PCE rose by 0.3 percent monthly, unchanged from the previous month and in line with market expectations.
Core PCE, which strips the volatile energy and food sectors, was unchanged at 2.8 percent year-over-year. This topped economists’ expectations of 2.6 percent. On a month-over-month basis, core PCE rose by 0.3 percent.
On a three-month annualized basis, core PCE inflation has risen to 4.4 percent, up from 3.7 percent in February.
Supercore PCE, excluding housing, jumped by 0.4 percent monthly and is back up to 3.5 percent year-over-year.
The reacceleration in the PCE was driven by a 1.2 percent increase in energy goods and services. Food costs were flat last month.
Additional BEA data showed that personal spending soared at a higher-than-expected pace of 0.8 percent last month, unchanged from the February reading. Personal income rose by 0.5 percent, up from 0.3 percent and in line with market expectations.
Market Reaction
U.S. stocks extended their pre-market rally following the PCE figures, with the leading benchmark indexes up as much as 1.3 percent.Treasury yields were in the red across the board. The benchmark 10-year yield fell below 4.67 percent, the two-year yield slipped below 4.99 percent, and the 30-year bond slumped below 4.78 percent.
The U.S. Dollar Index, a measurement of the greenback against a basket of currencies, kept its gains intact and remained at about the 105.7 mark.
The strong PCE print effectively “closes the door on any rate cuts in the short term,” Giuseppe Sette, the co-founder and president of investment research services firm Toggle AI, said.
“Rates are on hold for longer.”
Recent inflation pressures have signaled a change from being demand-driven to cost-driven, according to Bryce Doty, the senior vice president and senior portfolio manager at Sit Investment Associates.
“Cost pressures range from home insurance to commodities, especially energy,” Mr. Doty said in a note. “Large minimum wage increases and a persistent scarcity of labor feed higher costs of goods and services. Fed policy is to blame as well. High fed funds rates do dampen demand but it also makes it more costly for nearly every business to operate and for every family to balance a budget.”
However, the second inflation wave might be short-lived as consumers have exhausted their pandemic-era savings.
Growth Slowing, Inflation Rising
The first-quarter GDP report spotlighted an economy experiencing slower growth and rising inflation.In the January to March period, the economy rose by 1.6 percent, down from 3.4 percent in the fourth quarter. But although the worse-than-expected print raised eyebrows, the inflation metrics contributed to the bedlam observed in the U.S. stock market during the April 25 trading session.
The GDP Price Index, a gauge of prices that businesses, consumers, and governments paid for goods and services, surged to a higher-than-expected 3.1 percent in the first three months of 2024. This was up from 1.7 percent in the fourth quarter.
Personal consumption expenditure (PCE) prices climbed to 3.4 percent, up from 1.8 percent. Core PCE, which omits food and energy components, surged to 3.7 percent in the previous quarter. This was up from 2 percent and topped the consensus estimate of 3.4 percent.
This comes after the economy witnessed four consecutive hotter-than-expected CPI reports.
Although investors have refrained from pricing in a rate hike this year, the futures market has trimmed its expectations for the Federal Reserve’s pulling the trigger on its first rate cut.
According to the CME Fed Watch Tool, traders only anticipate one quarter-point rate cut happening in December.
Heading into another reading of the Fed’s preferred metric, many monetary policymakers have conceded the progress on inflation had stalled and that there was little urgency to cut the benchmark federal funds rate.
With increasing talk of stagflation—a blend of stagnating growth and high inflation—the White House says it is confident that inflation is “on a downward path.”
“That said, moderating inflation will allow the central bank to reduce rates,” she said.
“I believe the fundamentals here are in line with inflation continuing down back toward normal levels.”
“I know that Americans are concerned with the high cost of living in a number of different areas,“ she added. ”And it’s President Biden’s top priority to address that concern.”
The next two-day policymaking Federal Open Market Committee meeting will take place on April 30 and May 1.
