The Fed’s core inflation rate showed that core price pressures were hotter than expected in April. Hyperinflation, or basic services excluding housing, also increased. The S&P 500 initially lost momentum, then regained ground after the report, although the data supports the position of the Fed hawks looking to raise rates again. Progress in debt ceiling talks has taken center stage.
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Core inflation rate
The personal consumption expenditures, or personal consumption expenditures, price index rose 0.4% in April. This lifted the annual inflation rate by 4.4% against expectations of 4.2%.
Typically, Fed decision-making places more weight on core inflation, which excludes volatile food and energy prices. Core prices also rose 0.4% in April, while the 12-month core inflation rate came in at 4.7% vs. 4.6% expected.
Wall Street economists expected a 0.3% monthly increase for both the total PCE price index and core prices.
Federal Focus: Superservice Inflation
Starting late last year, Fed Chairman Powell shifted the focus of inflation to core personal consumption expenditure services excluding housing, or superservices. This is consistent with the Fed’s view that a tight labor market and high wage growth are the root cause of stubbornly high inflation. Wages make up a high percentage of the costs of a service business. Therefore, superservice inflation should abate as wage pressures moderate.
Personal consumption expenditures data for April for these services, such as healthcare, hair cutting and hospitality, showed prices rising 0.4% in the month. The increase for March was revised slightly higher to 0.29% from 0.24%. The 12-month inflation rate for basic non-residential services eased to 4.6% from 4.5%. However, the trend over the past three months has been better, with super prices up 4.35% at an annual rate. This is the lowest since last September.
Personal income and spending
Personal income rose 0.4% during the month, matching expectations for a 0.4% rise. Personal consumption expenditures rose 0.8%, double the expected gain, after two months of weak spending.
Possible Federal Reserve rate hike
Prior to the PCE inflation report, the markets were pricing odds of 41% A quarter-point rate hike at the Fed’s June 13-14 meeting. That jumped to 58.5% after the PCE data. Markets now see a 77% chance of a rally by the Fed’s July 25-26 meeting.
Standard & Poor’s 500
The S&P 500 rose 0.6% early Friday in stock market action after futures contracts briefly turned negative following inflation data. Futures were rising amid clear progress towards a debt ceiling deal.
A debt-ceiling deal wouldn’t necessarily pave the way for an extended rally for the S&P 500. Fading fiscal support and further Fed tightening, by offloading assets it bought during the pandemic, could be a downside.
Be sure to read IBD’s daily column, The Big Picture column to stay in sync with the fundamental direction of the market and what that means for your trading decisions.
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