Inflation was in line with expectations in April, according to a measure released by the Federal Reserve on Friday, and markets are nervous about when interest rates might start to fall.
this personal consumption expenditures price index Excluding food and energy costs, costs rose just 0.2% during the period, in line with Dow Jones estimates, the Commerce Department reported.
On an annual basis, core PCE grew 2.8%, 0.1 percentage point higher than expected.
Including the volatile food and energy categories, PCE inflation was at an annual rate of 2.7%, compared with 0.3% in the previous quarter. The numbers are in line with predictions.
Fed officials prefer personal consumption expenditures (PCE) data to the more closely watched consumer price index compiled by the Labor Department. The Commerce Department’s measure takes into account changes in consumer behavior, such as the replacement of more expensive goods with cheaper ones, and is broader than the Consumer Price Index.
“The core index is at 2.8%. That’s good, but it’s been trading in a range for five months, which to me is pretty tricky,” said Dan North, senior economist for North America at Allianz Trading. “If I’m (Federal Reserve Chairman Jerome) Powell, and I’d like to see this start to come down and barely spread… I haven’t gotten Pepto yet, but I don’t feel good about it. That’s not what you want to see.
Energy prices rose 1.2%, boosting overall gains. Food prices fell 0.2% this month.
Commodity prices increased by 0.2% and service prices by 0.3%, continuing the trend of economic normalization with services and consumption as the main driving force.
In addition to the inflation data, data released on Friday also includes income and expenditure.
Personal income rose 0.3% this month, in line with expectations, while spending grew only 0.2%, below expectations of 0.4% and below the 0.7% downward revision in March. Adjusted for inflation, the spending figure fell 0.1%, largely due to a 0.4% decline in spending on goods, while spending on services increased just 0.1%.
Market reaction to the news was that futures prices tied to major stock indexes rose while U.S. Treasury yields fell.
Chris Larkin said: “The PCE price index is not showing much progress on the inflation front, but it is not showing any regression either. Based on the initial reaction of stock index futures, the market will mainly view this as positive. “Managing Director of E-Trade Trading Investments at Morgan Stanley.
“However, investors must remain patient,” he added. “The Fed has indicated that it will take more than a month of favorable data to confirm that inflation is indeed moving lower again, so there is still no reason to think that the first rate cut will come earlier than September.”
Central bank officials encouraged caution as inflation data beat expectations. This means they are less likely to cut interest rates in the short term.
Most recently, New York Fed President John Williams said Thursday that while he is confident inflation will continue to recede, prices remain too high and he has not made enough progress toward the Fed’s 2% annual target.
Markets have tempered expectations for a rate cut this year. Pricing Friday morning suggested the first action may not come until the Fed meeting, which ends two days after the November presidential election.
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