Federal Reserve’s preferred inflation measure rises above expectations

Recent data released by the Commerce Department has shown that the Federal Reserve’s preferred measure of inflation, the Core PCE price index, increased 4.6% annually and 0.3% monthly in February, which is a slight increase from the 4.5% increase expected by analysts. The Core PCE inflation rate, which excludes food and energy, rose 0.3% in March, also above expectations, reflecting upward revisions to January data, which saw core PCE prices rise by a revised 0.6% on the month. However, the annual figure was slightly above expectations at 4.6%.[0] The Fed uses the PCE price indexes to gauge how much consumers are paying for goods and services for its 2% inflation target, with the Core PCE being its preferred inflation measure.

The market consensus is that the March Core PCE Price Index will remain at +0.3% m/m and +4.5% y/y, compared to the previous values of +0.3% m/m and +4.6% y/y.[1] However, a reading greater than 0.3% monthly or 4.5% yearly would generate more uncertainty on the rate front, possibly sparking speculation on another Fed hike in June. Conversely, weaker PCE data will fuel fresh speculation that the US central bank will pause the rate-hiking cycle after May.

The Federal Reserve has already raised its benchmark interest rate nine times this cycle in a bid to corral runaway inflation, with markets widely expecting the rate-setting Federal Open Market Committee to approve another quarter-percentage-point increase at next week’s meeting.[2] However, consumer spending was flat in March, tailing off considerably from a January splurge, indicating a softening economy.[3] Despite a year’s worth of interest rate increases, inflation rose again in March, with prices still rising far faster than the annual rate of 2% the Fed has set as its target.[2]

0. “March PCE Price Index Preview: Here’s Why Fed’s Favorite Inflation Gauge Is A Key Market-Moving Event Bef” Benzinga, 27 Apr. 2023, https://www.benzinga.com/economics/macro-economic-events/23/04/32049665/march-pce-price-index-preview-heres-why-feds-favorite-inflation-gauge-is-a-key-ma

1. “S&P Futures Tick Lower Ahead of Key U.S. Inflation Data” Barchart, 28 Apr. 2023, https://www.barchart.com/story/news/16402155/s-p-futures-tick-lower-ahead-of-key-u-s-inflation-data

2. “Key inflation gauge for the Fed rose 0.3% in March as expected” CNBC, 28 Apr. 2023, https://www.cnbc.com/2023/04/28/key-inflation-gauge-for-the-fed-rose-0point3percent-in-march-as-expected.html

3. “Consumer spending flattens out in the early spring as the economy softens” Morningstar, 28 Apr. 2023, https://www.morningstar.com/news/marketwatch/20230428338/consumer-spending-flattens-out-in-the-early-spring-as-the-economy-softens