Key Fed Inflation Gauge Drops — Evening Brief – 05.31.24
Following a slightly weaker-than-expected CPI print two weeks ago, and with inflation data generally surprising to the downside, the Federal Reserve’s preferred inflation gauge, the core PCE Price Index, increased 0.2% in April, matching the consensus estimate and slowing slightly from the +0.3% pace in March.
Core PCE increased 2.8% year on year, as expected and at the same pace as in March. Fed policymakers prefer to focus on the core measure because it better captures underlying inflation trends.
Core inflation hasn’t been this low since March 2021, allowing the Fed to breathe easier and perhaps stick to its plans to cut interest rates.
Meanwhile, the PCE Price Index increased by 0.3% in April, versus 0.3% projected and 0.3% in March. On a year-over-year basis, the measure rose 2.7%, unchanged from March and in line with expectations.
“Spending slowing and near miss on a 0.2% supports the idea that we are setting up for a Fall rate cut by the Fed,” said RSM U.S. chief economist Joseph Brusuelas on a post on X.
He observed that PCE supercore (services excluding housing) fell to 3.429% from 3.482%. “Much like the topline data, it reflects a modest improvement in the slowing of inflation growth.”
Following the inflation print, market pricing indicated a 50.5% chance that the first interest rate cut will occur by the September 18 policy meeting, up slightly from 49% before the report was released.
Atlanta Fed President Raphael Bostic offered some optimism for the doves. Speaking at a conference on Wednesday, he stated that several inflation indicators continue to move toward the central bank’s target range, and that a rate cut is still possible in the fourth quarter of this year.
Meanwhile, the Wall Street Journal’s Fed whisperer Nick Timiraos reports that while the 12-month change was 2.75%, a three-year low, the 6-month annualized rate was 3.18%, the highest since July.
He also notes that the “3-month annualized rate was 3.46%, down from the previous two months but still higher than any point in 2H 2023” which leads him to concludes that “this report was largely anticipated two weeks ago and won’t change much of anything for the near-term Fed outlook of “wait and see.”
“We will need to accumulate further data over the coming months to have a clearer picture of the inflation outlook,” Loretta Mester, outgoing president of the Federal Reserve Bank of Cleveland, advised earlier this month. “I now believe that it will take longer to reach our 2% goal than I previously thought.”
Moving forward, with household debt at an all-time high, consumer confidence generally declining, and interest rates at a two-decade high, it’s unclear how much longer consumers will drive the economy.