The headline Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation measure, climbed at 4.2% in the year through March. That was a big drop from the 5.1% year-over-year rate in February. (Although, I’d note, economists were expecting this all items number to drop to 4% before the actual report.)
But the core inflation rate, after stripping out more volatile food and fuel prices, hardly budged in March at 4.6% year-over-year from the 4.7% year-over-year rate in February.
And it’s the core PCE inflation rate that carries the most weight with the Federal Reserve.
In other words, inflation remains elevated and very, very sticky.
Today’s PCE inflation report wasn’t totally without bright spots. Prices of services excluding housing and energy services, a key worry flagged by the Fed since prices in the service sector have been climbing faster than other prices, increased only 0.2% in March, according to Bloomberg. However, that left service prices up 4.55 year over year.
The Fed’s Open Market Committee meets on interest rates on May 3. The consensus is that the Fed will raise interest rates by another 25 basis points to a range of 5.00% to 5.25%. The CME Fed Watch Tool, which calculates the odds of a Fed move from prices in the Fed Funds Futures market, put the odds of a 25 basis point move on May 3 at 80.2% today. That’s down from 83.9% yesterday.
Meanwhile, the Labor Department’s measure of wage costs—another number closely watched by the Fed–increased 1.2% in the first quarter from the previous quarter. That exceeded forecasts. Labor costs have risen by at least 1% for seven straight quarters, extending what was already a record streak in data back to 1996.
Despite today’s inflation numbers, traders and investors decided that the odds of an additional interest rate increase at the Fed’s June 14 meeting are actually lower today. The odds of another 25 basis point increase, after a 25 basis point increase at the My 3 meeting, fell on the CME Fed Watch Tool to 19.5% today from 26.8% yesterday.
Also today, the University of Michigan survey of consumer sentiment showed that longer-term inflation expectations ticked up in April. Consumers surveyed by the University of Michigan expect inflation to average 3% over the next five to 10 years, up from 2.9% in March.
At the close today, the Standard & Poor’s 500 was up 0.83% and the Dow Jones Industrial Average had climbed 0.80%. The NASDAQ Composite was up 0.68% and the NASDAQ 100 gained 0.65%. The Russell 2000 small-cap index added 1.01% at the close.
The yield on the 10-year Treasury fell to 3.42%, down 10 basis points.
