The gauge of inflation tracked by the Federal Reserve rose slightly less than expected in February, providing some hope that interest rate hikes are helping ease price rises. The personal consumption price index excluding food and energy (PCE) rose 0.3% in February, below expectations for 0.4% and below the 0.5% increase in January.
On an annual basis, core PCE rose 4.6%, a slight slowdown from January. Including food and energy, PCE rose 0.3% in February and 5% on the year, compared to 0.6% and 5.3% in January. The better-than-expected data came with monthly energy prices down 0.4% while food prices rose 0.2%. Prices of goods rose by 0.2% while services rose by 0.3%. Additional data from the report show that personal income increased by 0.3%, slightly above the expected 0.2%. Consumer spending rose by 0.2%, compared to expectations for 0.3%.
The better-than-expected data sends the Wall Street stock market higher while longer-term Treasury yields fall. “The trend in inflation looks promising for investors. Inflation will likely be below 4% by the end of the year, which will give the Federal Reserve some leeway to cut interest rates by the end of the year if the economy enters a recession,” said Jeffrey Roach, chief economist at LPL Financial.
Following the data, there is parity in the market pricing regarding the Fed’s next interest rate increase, with half expecting a 0.25% increase and half not expecting an increase at all and the interest rate remaining at its current level. The Fed’s own unofficial forecasts released last week pointed to perhaps one more hike this year and no reduction. However, traders still expect some interest rate cuts this year, pricing in an interest rate of 4.25%-4.5% at the end of the year, half a point below the current target range.
Fed officials are looking at the rise in inflation and expect rents to fall over the course of the year. However, inflation is expected to remain well above the Fed’s 2% target for 2024, and officials have said they are focused on lowering prices despite the current banking turmoil.
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