Inflation rose as expected in April, with markets anticipating when interest rates might start to fall, according to a measure released Friday and closely followed by the Federal Reserve.
The Commerce Department said the PCE price index excluding food and energy costs rose just 0.2% during the period, in line with Dow Jones estimates.
On an annual basis, core personal consumption expenditures rose 2.8%, or 0.1 percentage point above estimates.
Including the volatile food and energy category, PCE inflation was 2.7% year-on-year and 0.3% YoY. These numbers were in line with expectations.
Fed officials prefer to read personal consumption expenditures on the closely watched Consumer Price Index, which is compiled by the Labor Department. The Commerce Department's measure takes into account changes in consumer behavior such as substitution of less expensive items for more expensive alternatives, and has a broader range than the CPI.
“The core index came in at 2.8%. That's good, but it's been trading in a range for five months now, so that's pretty consistent for me,” said Dan North, chief North America economist at Allianz Trade. “If I were (Fed Chairman Jerome) Powell, I would like to see that start to move down, just barely creeping up. … I haven't gotten to Pepto yet, but I'm not feeling good. That's not what you want to see.”
A 1.2% rise in energy prices helped drive the main increase. Food prices recorded a decline of 0.2% on a monthly basis.
Goods prices rose by 0.2%, while services saw an increase of 0.3%, continuing the trend of normalization in an economy where services and consumption provide much of the fuel.
In addition to the inflation reading, Friday's statement included data on income and spending.
Personal income rose 0.3% month over month, matching estimates, while spending rose just 0.2%, below estimates of 0.4% and below March's downwardly revised reading of 0.7%. Adjusted for inflation, spending figures showed a decline of 0.1%, due in large part to spending on goods falling by 0.4% and spending on services rising by just 0.1%.
The market reaction after the release saw futures linked to major stock averages rise while Treasury yields fell.
“The PCE price index has not shown much progress on inflation, but it has not shown any decline either. Based on the initial reaction in stock index futures, the market will view it as mostly positive,” Chris Larkin said. Managing Director of E-Commerce Trading and Investing from Morgan Stanley.
“However, investors will have to be patient,” he added. “The Fed has suggested that it will take more than a month of positive data to confirm that inflation is moving reliably lower again, so there is still no reason to believe the first rate cut will come before September.”
As inflation data came in hotter than expected, central bank officials encouraged a cautious approach. This means less likelihood of interest rates being cut anytime soon.
More recently, New York Fed President John Williams said Thursday that while he is confident that inflation will continue to decline, prices are still too high and he has not seen enough progress in moving to the Fed's annual target of 2%.
Markets have curbed their expectations of interest rate cuts this year. Pricing on Friday morning pointed to the possibility that the first move would not come before November, at the Fed's meeting that concludes two days after the presidential election.
