Fed’s Preferred Inflation Gauge Puts Spotlight On Cuts

April 1, 2024

The Federal Reserve’s preferred inflation metric fell in line with expectations in February, leaving many to wonder if inflationary pressures will subside enough this spring for the central bank to begin cutting interest rates this summer.

The personal-consumption expenditures (PCE) price index rose 0.3% in February from the month before, according to the Commerce Department. On a 12-month basis, PCE was up 2.5%, up slightly from January’s 2.4% increase. Both figures match estimates from Dow Jones.

Excluding food and energy, the “core” PCE, was up 2.8%, also in line with expectations. While the Fed looks at both the headline and core measures when making policy, it considers core to be a better gauge of long-term inflation pressures. The Fed targets 2% annual inflation, a level that core PCE inflation has not been below in three years.

Climbing energy costs helped push the headline figure higher, with an increase of 2.3% for the month. However, much of the increase in core inflation came from goods, which increased 0.5% for the month, higher than the 0.3% increase for services. This runs counter to recent inflationary trends, which have seen prices climb for services much faster than goods. Over the past year, prices for services rose 3.8% while goods prices actually fell 0.2%.

The inflation report comes a little more than a week after the Fed held interest rates steady, indicating that not enough progress has been made in the fight against inflation to begin cutting. While Fed policymakers reiterated their intentions to make three interest rate cuts this year, the timing remains undetermined. 

Traders overwhelmingly believe that the Fed officials will hold rates steady again at their upcoming May meeting, which the latest PCE report supports. Traders are roughly split, however, on whether we see a rate cut at the June meeting, with 49.1% predicting a cut and 50.8% anticipating that rates will hold steady once again, according to data from the CME Group.

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