On Friday, May 31st, according to an indicator closely watched by the Federal Reserve, inflation in April rose roughly in line with expectations, leaving the market feeling uncertain about when a rate cut might occur.
Data from the U.S. Department of Commerce showed that in April, the Personal Consumption Expenditures Price Index (core PCE price index) excluding food and energy costs increased by 0.2% compared to the previous month, matching estimates from Dow Jones.
On an annual basis, core PCE rose by 2.8%, exceeding expectations by 0.1 percentage points. Including the more volatile food and energy categories, PCE inflation on a yearly basis was at 2.7%, up by 0.3% from a month ago.
These figures, as reported by CNBC, met expectations. Federal Reserve officials prefer the PCE reading over the more widely watched Consumer Price Index (CPI), which is compiled by the Department of Labor. The Commerce Department’s indicator takes into account changes in consumer behavior, such as substituting cheaper goods for more expensive ones, and has a broader scope than the CPI.
Energy prices rose by 1.2%, driving the overall increase; while food prices fell by 0.2% during the month.
Goods prices rose by 0.2%, and service prices increased by 0.3%, continuing to reflect the trend of economic normalization, as services and consumption are key drivers of the economy.
In addition to inflation data, the data released on Friday also included income and spending figures.
Personal income increased by 0.3% for the month, in line with expectations, while spending only grew by 0.2%, below the expected 0.4% and lower than the revised 0.7% from March. Adjusted for inflation, spending data declined by 0.1%, largely due to a 0.4% decrease in goods spending, with services spending only showing a 0.1% increase.
Following the release of the data, market reactions indicated futures tied to major stock averages rose, while U.S. Treasury bond yields fell.
“The PCE price index did not show significant progress in inflation, but it also did not show any regression. Based on the initial response of stock index futures, the market mostly views it as positive,” said Chris Larkin, managing director of trading and investing at Morgan Stanley E-Trade.
“However, investors must remain patient,” he added. “The Fed has indicated that more than a month of favorable data is needed to confirm a reliable downward trend in inflation, so there is still no reason to believe that the first rate cut would come before September.”
Given the hotter-than-expected inflation data, central bank officials are advocating for a cautious approach, signaling that the likelihood of a rate cut in the near term is lower.
New York Federal Reserve President John Williams stated on Thursday that while he believes inflation will continue to ease, prices remain too high, and he has not seen sufficient progress by the Fed in achieving its 2% annual target.
Expectations for a rate cut this year have been reined in by the market. Pricing on Friday morning indicated that the first rate cut may not come until November, with a Fed meeting scheduled just two days after the presidential election.