Inflation Surges, Consumer Spending Rises: Fed on Course to Increase Rates
Economists were caught off-guard this week as the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures price index, came in hotter than expected. The PCE index rose 0.6% in January, both in core and headline terms, compared to the 0.2% rise in December. The core PCE index, which strips out volatile food and energy prices, rose 4.7%, more than the forecast of 4.3%. The 12-month PCE inflation rate was 5.4%.[0]
The higher-than-expected inflation data has prompted a flurry of debate among central bankers on the need to adjust the pace of interest-rate increases. Presently, the likelihood of a 0.25% rise in the interest rate from 4.75%-5.00% in March is estimated at 73%, and the chance of an additional 0.25% bump in May is calculated at 70.3%.[1] The likelihood of an additional rate increase to between 5.25% and 5.5% in June is slightly more than 50%, according to CME's FedWatch Tool.[1]
Ten-year U.S. Treasury yields jumped 0.08 percentage points, to 3.91% as of mid-morning, while the S&P 500 fell below a key support level.[2] The higher rates are putting pressure on earnings, and investors are now expecting the Fed to increase rates by either a quarter or a half of a percentage point next month.
Along with the higher-than-expected inflation data, consumer spending surged to start 2023.[3] Much of January's inflation surge came from a 2% rise in energy prices, according to the report.[4] The food prices rose by 0.4%.[4] Both goods and services experienced an increase of 0.[4]
Cleveland Fed President Loretta Mester, a nonvoting member of the rate-setting Federal Open Market Committee, has been pushing for more aggressive increases.[4] At the March FOMC meeting, she expressed uncertainty as to whether she would once again push for a 0.5% increase.[4]
The strong inflation data and consumer spending suggest that inflation accelerated to start the new year, putting the Fed in a position where it likely will continue to raise interest rates.[4] In March 2022, the central bank increased benchmark rates by 4.5 percentage points in response to the highest inflation rate in 41 years.[4]
0. “Fed minutes, PCE inflation, Walmart earnings: What to know this week” Yahoo News, 19 Feb. 2023, https://news.yahoo.com/stock-market-week-ahead-pce-inflation-federal-reserve-retail-earnings-142330965.html
1. “Wall Street Breakfast: The State Of Inflation” Seeking Alpha, 24 Feb. 2023, https://seekingalpha.com/article/4581642-wall-street-breakfast-state-of-inflation
2. “Bond yields keep on rising” Axios, 21 Feb. 2023, https://www.axios.com/2023/02/21/bond-yields-keep-on-rising
3. “Gold price remains under pressure, but largely ignores hotter inflation data as core PCE rises 0.6% in January, annual …” Kitco NEWS, 24 Feb. 2023, https://www.kitco.com/news/2023-02-24/Gold-price-remains-under-pressure-but-largely-ignores-hotter-inflation-data-as-core-PCE-rises-0-6-in-January-annual-inflation-rises-4-7.html
4. “Key Fed inflation measure rose 0.6% in January, more than expected” NBC News, 24 Feb. 2023, https://www.nbcnews.com/business/business-news/key-fed-inflation-measure-rose-06-january-expected-rcna72219
