The Federal Reserve’s core inflation gauge is higher

By Andrew Moran

The Federal Reserve’s preferred inflation gauge rose unexpectedly in April, leading to fears that the US central bank could raise interest rates for the 11th consecutive month in June.

The annual personal consumption expenditures (PCE) price index rose to 4.4 percent in April from 4.2 percent, according to the Bureau of Economic Analysis (BEA). On a monthly basis, the headline PCE price index rose 0.4 percent, up from 0.1 percent in the previous month.

Core PCE, which excludes volatile food and energy components, rose to 4.7 percent year-over-year from 4.6 percent. This was also above the consensus estimate of 4.6 percent. Core PCE also rose 0.4 percent from March to April, up from 0.3 percent.

Overall, the BEA said it was the first jump in PCE inflation since October, reflecting gains in consumption of goods (0.8 percent) and services (0.3 percent).

Government data shows that prices of goods rose by 2.1 percent and prices of services rose by 5.5 percent. Food prices rose sharply to 6.9 percent, but energy prices fell to 6.3 percent.

Looking at inflation data for May, the Cleveland Fed Bank’s Inflation Nowcasting model projects annual PCE to fall to 3.9 percent and core PCE to reach 4.7 percent.

Other BEA data showed current dollar and disposable personal income both rose 0.4 percent last month, up from 0.3 percent in March. Similarly, personal spending rose 0.8 percent, more than 0.1 percent, and better than market forecasts of 0.4 percent.

Consumer personal interest payments rose to $448.3 billion in April from $444.2 billion in the previous month as borrowing costs rose. The personal savings rate fell from 4.5 percent to 4.1 percent.

This comes after the BEA reported in its second estimate that PCE and core PCE rose to 4.2 percent and 5 percent, respectively, in the first quarter.

The probability of an interest rate hike is increasing

Market watchers say that’s not what Fed Chairman Jerome Powell and monetary policymakers want to see, as it could support the case for another rate hike next month.

Federal Reserve Board Chairman Jerome Powell attends a press conference following the two-day meeting of the Federal Open Market Committee on July 27, 2022 in Washington. (Elisabeth Franz/Reuters)

After two days of inflation data The futures market is now pricing in a quarter-point rate hike at the June Federal Open Market Committee (FOMC) policy meeting. If the Fed pulls the rate hike trigger, the institution will raise the benchmark fed funds rate to between 5.25 percent and 5.50 percent.

Another rate hike would officially be higher than the expected policy average of 5.1 percent, according to the Fed’s Survey of Economic Outlook (SEP) in March (pdf).

Despite the shift in expectations for additional tightening, Preston Caldwell, senior economist at Morningstar Research Services, believes the Fed ended its rate hikes in May and could begin tapering later this year.

“Once the Fed wins the war on inflation, it will move to cut rates to get the economy moving again,” he wrote in a research note, adding that a recession by the end of the year is likely.

However, the hotter-than-expected data “also complicates the Fed’s already partially failed hiking cycle,” wrote lead economist Mohamed El-Erian. Twitter:.

Other economic data

New orders for U.S. durable goods rose 1.1 percent in April, compared with a revised 3.3 percent in March, according to the Census Bureau. But durable goods orders came in better than market expectations at negative 1 percent.

Last month, orders for durable goods, excluding defenses, fell 0.6 percent.

The goods trade deficit widened 17 percent to a six-month high of $96.8 billion. Exports fell 5.5 percent to $163.3 billion as domestic companies shipped fewer consumer goods, industrial supplies, oil and automobiles. Imports rose 1.8 percent to $260 billion, driven by increased demand for new cars and trucks.

Retail inventories, excluding autos, fell 0.1 percent from a 0.1 percent gain in March. Wholesale inventories fell 0.2 percent, slightly better than a 0.3 percent gain in March.

Data from the beginning of the second quarter show that the US economy remains stable amid rising interest rates, the credit crunch and persistent inflation. In addition, the first quarter gross domestic product (GDP) growth rate was revised higher by the BEA, from 1.1 percent to 1.3 percent.

Financial markets were trading flat in pre-market trade following recent inflation readings, with leading benchmark indexes up around 0.1 percent. Instead, investors have largely focused on debt ceiling negotiations as the White House and Republicans move closer to finalizing a deal to raise the debt ceiling.

U.S. Treasuries were mostly higher across the board, with the benchmark 10-year yield adding nearly 2 basis points to nearly 3.84 percent. The one-month bill added more than 8 basis points to the company above 5.78 percent.

The US Dollar Index ( DXY ), a gauge of the dollar against a basket of currencies, took a breather to end the trading week, sliding to 104.00. This week the figure is about 1 percent.

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