Fed’s Preferred Inflation Gauge Comes in Higher Than Expected

May 30, 2023

Inflation remained stubbornly high in April, increasing the chances for another rate hike or that interest rates could stay higher for longer, according to the Federal Reserve’s preferred inflation index.

The personal consumption expenditures (PCE) price index, which tracks prices for a variety of goods and services, showed a slight uptick in inflation. On an annual basis, the PCE was up 4.4%, higher than March’s 4.2% annual increase.

The “core” PCE, which excludes volatile components like food and energy, rose 0.4% from the month prior, higher than the 0.3% increases economists from Dow Jones had expected. On an annual basis, the core PCE increased 4.7%, also higher than economist forecasts and an increase from March’s 4.6% year-over-year increase.

Monthly price increases were spread nearly evenly between goods, which rose 0.3%, and services, which were up 0.4%. Food prices fell 0.1%, but this decline was offset by a large 0.7% increase in energy prices. Annually, goods inflation was up just 2.1% while services rose 5.5%, a further indication that inflation has been primarily driven by services over the past year.

The report comes just a few weeks ahead of the Fed’s policy meeting on June 13, and raises concerns about whether the Fed will pause rate hikes. Immediately following the report, market pricing swung to a 56% chance that the Fed will enact another quarter percentage point interest rate hike at the June meeting, according to the CME Group.

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