Evening Brief – 08.31.23
To the Core
The Federal Reserve’s preferred inflation rate indicated that core price pressures moderated further in July. However, Fed Chair Jerome Powell is increasingly highlighting price adjustments for services other than housing and energy, which increased last month.
The Bureau of Economic Analysis reported that the Core PCE Deflator climbed to 4.2% year on year in July, which was in line with expectations but higher than the 4.1% print in June. Typically, the Federal Reserve bases its decisions on core inflation.
The headline PCE Price Index increased to 3.3% from a year ago, which was also as forecasted but higher than the 3% rate in June. The PCE Price Index and the Core PCE Price Index both climbed 0.2% monthly, as expected.
The Fed’s stance on ex-Shelter Services inflation is even more concentrated, and the PCE-equivalent shows it is anchored at high levels at 4.69% annualized, only slightly below the 2021 peak of 5%.
Meanwhile, consumer spending increased, which may continue to put upward pressure on prices. Personal income increased by 0.2% in July, compared with 0.3% in June, and fell short of forecasts of +0.3%.
Personal spending increased by 0.8% in July, compared with 0.5% in June and expectations of 0.7%. Real personal spending increased 0.6% in August, compared with 0.4% the previous month.
While the report is encouraging, it highlights that the effort to reduce inflation may be slow and arduous. The takeaway is that while the Fed still has work to do officials will likely keep interest rates high for long.
“We remain skeptical that inflation is on track to return to (the Fed’s) 2% target without a significant easing of labor market conditions,” Barclays wrote in a research note. The firm anticipates another quarter-point rate hike in November.
The CME Group FedWatch Tool showed that the probability of the Federal Reserve leaving the Fed funds rate steady this year was 43% after the data. Before a surprisingly big drop in job openings reported on Tuesday, odds for a hike at the November 1 meeting were above 60%.
The equity markets, which have rallied sharply this week, continued their ascent on Thursday while US Treasury yields continued their week-long retreat as market participants seemed to downplay the significance of the stubbornly elevated supercore service inflation data.