In March, inflation remained elevated, with the personal consumption expenditures price index excluding food and energy increasing by 2.8% from a year ago, the same as in February. Including food and energy, the all-items PCE price gauge increased by 2.7%. Both measures increased by 0.3% on a monthly basis, as expected. Despite this, markets showed little reaction to the data, with Wall Street poised to open higher and Treasury yields falling. Futures traders have slightly increased the probability of two potential rate cuts this year to 44%, according to the CME Group’s FedWatch gauge.
Chief Investment Officer George Mateyo cautioned investors not to get overly anchored to the idea that inflation has been completely cured and that the Fed will cut interest rates in the near-term. While the prospects of rate cuts remain, they are not assured, and the Fed will likely need to see weakness in the labor market before they consider cutting rates. Personal spending rose by 0.8% on the month, slightly higher than expected, while personal income increased by 0.5%. The personal saving rate fell to 3.2%, down from February as households dipped into savings to maintain spending levels. The report likely locks the Fed into holding interest rates steady unless there is a substantial change in the data.
In the first quarter, PCE accelerated at a 3.4% annualized rate while gross domestic product increased by just 1.6%, well below expectations. With inflation still elevated after two years, central bank policymakers are closely watching the data as they plan their next moves for monetary policy. The Fed targets 2% inflation, a level that core PCE has exceeded for the past three years. The Fed focuses on the PCE as it adjusts for changes in consumer behavior and places less emphasis on housing costs compared to the consumer price index. Fed officials believe the ex-food and energy figure provides a more reliable look at longer-run trends.
Services prices increased by 0.4% on the month, while goods were up by 0.1%, reflecting a shift back to consumer prices as goods inflation dominated since the early days of the Covid pandemic. Food prices showed a 0.1% decline, while energy rose by 1.2%. On a 12-month basis, services prices are up by 4% while goods have barely moved, increasing by just 0.1%. Food prices increased by 1.5%, and energy by 2.6%. The data indicates that inflation remains a concern, and the Fed may need to see more significant changes in the data before making any decisions on interest rates.
Overall, the inflation data for March shows that price pressures remain elevated, with little sign of easing. Consumers are still spending despite the high price levels, with personal spending rising by 0.8% on the month. The Fed is closely monitoring the data as they navigate their next moves for monetary policy. While markets remained relatively stable in response to the data, investors should not assume that inflation has been entirely addressed. The Fed may need to see more substantial changes in the data, particularly in the labor market, before considering any rate cuts. As inflation remains a key concern, it is crucial for policymakers to carefully analyze the data before making any decisions that could impact the economy.
