US Core PCE Price Index Hits 4.7%, Signalling Possible Further Rate Increases
On Friday, February 24, the US Bureau of Economic Analysis released the Personal Consumption Expenditures (PCE) Price Index data for January.[0] The Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, edged higher to 4.7% from 4.6% in the same period, compared to analysts' forecast of 4.3%. Core PCE inflation and PCE inflation both increased by 0.6% on a monthly basis.
The annual Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, is a key metric which has been gaining attention among speculators in the past year as price pressures have skyrocketed.[1] Over the last year, core Personal Consumption Expenditures (PCE), the Federal Reserve's primary measure of inflation, increased by 4.7% from December's 4.6%. It was anticipated by economists that the annual inflation rate would increase by a much lower amount of 4.3%.[2]
Data that is stronger than anticipated suggests that the Federal Reserve may need to take action to further restrict demand and reduce inflation to its 2% goal.[3] It is now anticipated that the markets will experience 25 basis point increases in the rate in March, May, and June.[3] According to the CME FedWatch tool, the chances of a 25-bp increase to 5.25%-5.50% is 51.9%, and the likelihood of 5.50%-5.75% is 23.5%.[3]
In January, personal income increased 0.6%, helped by a big increase in inflation-adjusted Social Security payments. Typically, incomes increase at a much slower rate.[4] At the beginning of the year, incomes saw an increase of 0.6%, supported by a rise in wages. A sizable uptick in the yearly cost-of-living adjustment for Social Security and Supplemental Security Income, the biggest in decades, has mitigated the effects of the expiration of the extended child tax credit and the decline in one-time payments made by states.[5]
Jerome Powell, the Chair of the Federal Reserve, has expressed the significance of inflation in core services excluding housing costs.[5] It is believed that this group, which covers a wide range of items from health care to haircuts, is mainly determined by wages.[5] Data from late 2022 had previously indicated that the Fed's path to controlling prices and demand would be shorter and smoother. However, resilient spending and stubborn inflation suggest that this path will be more difficult and drawn out.[5]
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. “US PCE Inflation Preview: Can the US Dollar turn bullish for good?” FXStreet, 23 Feb. 2023, https://www.fxstreet.com/analysis/us-pce-inflation-preview-can-the-us-dollar-turn-bullish-for-good-202302230933
2. “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
3. “Consumer spending jumps more than expected in January, PCE inflation speeds up” Seeking Alpha, 24 Feb. 2023, https://seekingalpha.com/news/3940619-consumer-spending-jumps-more-than-expected-in-january-pce-inflation-speeds-up
4. “Consumer spending posts biggest gain in almost two years. Don't expect it to last” MarketWatch, 24 Feb. 2023, https://www.marketwatch.com/story/consumer-spending-posts-biggest-gain-in-almost-two-years-on-strong-auto-sales-3be782d
5. “Fed's Preferred Inflation Gauge Accelerates, Adding Pressure for More Rate Hikes” Yahoo! Voices, 24 Feb. 2023, https://www.yahoo.com/now/fed-preferred-inflation-gauge-accelerates-135729762.html
