The Fed’s preferred measure of inflation came in lower than expected in May, a reassuring sign that the era of gluttonous prices is over – but likely not fast enough to prevent the central bank from continuing to raise interest rates.
The core PCE price index, also known as the core PCE deflator, rose 0.3% month over month in May, down from 0.4% in April and below expectations of 0.4% among economists polled by FactSet. Core personal consumption expenditures rose 4.6% year-on-year, down from 4.7% in April and also lower than estimates.
Core personal consumption expenditures, which include volatile food and energy prices, rose 3.8% from a year earlier in May. The increase was the lowest since April 2021 – a sign of how far inflation has come since it peaked at 7% in June 2022.
This is excellent news about fighting inflation. If you don’t think inflation is happening, you’re not paying attention, said Jamie Cox, managing partner at Harris Financial Group.
However, inflation remains above the Fed’s 2% target. Investors expect the central bank to continue raising interest rates, as it has aggressively done since March 2022 to tame the hottest price growth in decades.
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The latest set of PCE data, the last such release before the Fed’s next interest rate decision in late July, should ease nerves about how much more the central bank will tighten financial conditions this year. After 10 consecutive rate hikes, the Fed hit the pause button in June but warned that further increases may be necessary.
Investors, for their part, rejoiced at the better-than-expected data as markets head into the weekend and the end of the first half of 2023. By late morning, the Dow Jones Industrial Average was up 220 points, or 0.6%, with the S&P 500 up 1.1%. .
“While the immediate reaction in equity markets remains positive, core inflation remains flat,” said Quincy Crosby, strategist at LBL Financial. “This report supports the July 26 rate hike as warned by Jerome Powell.”
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However, while interest rate futures have recently shown increased odds of rate hikes in July and September, given strong economic data and hawkish comments from Fed Chairman Jerome Powell, the landscape is changing.
Chances of a quarter-point rate hike in July fell to 87% from 89% Thursday, according to the CME FedWatch Tool, which tracks Fed funds futures, with odds of interest rates rising steadily to 13% from 11%. While markets had projected a 27% chance of a half-point rate hike in September as of Thursday, that chance had fallen to 19% by Friday.
While there may be less inflation data ahead of the next Fed decision, investors will have more to chew on. The next big catalyst could be the June jobs report, due July 7, as the Fed continues to monitor the tight labor market.
Write to Jack Denton at [email protected]
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