In March, inflation continued to exert its influence, maintaining a firm hold on the economy as indicated by the Federal Reserve’s close monitoring of the Personal Consumption Expenditures (PCE) price index. Unfortunately, there was no respite in sight, as the core PCE—excluding volatile food and energy costs—remained stubbornly high at 2.8% from the previous year. This figure mirrored February’s reading and exceeded expectations, signaling sustained inflationary pressures.
When accounting for food and energy costs, the all-items PCE edged up to 2.7%, slightly surpassing the forecasted 2.6%. Despite these concerning figures, the market reaction was subdued. While Treasury yields experienced a slight dip, the overall sentiment on Wall Street remained optimistic, with indications of a higher market open. Some investors even speculated that the Federal Reserve might implement two rate cuts within the year, with the probability of such actions increasing to 44%.
Despite these speculations, George Mateyo, a prominent figure at Key Wealth, remained calm amidst the inflationary concerns. He cautioned against premature assumptions that the Fed would hastily resort to rate cuts, suggesting instead that policymakers would likely adopt a cautious approach and wait for clear signals of labor market strain before considering such measures.
Consumer spending, meanwhile, demonstrated resilience in the face of escalating prices. March saw a 0.8% increase in spending on goods, slightly surpassing expectations, accompanied by a corresponding 0.5% rise in personal incomes—a figure largely in line with forecasts. However, the decline in the personal saving rate to 3.2%, down from 3.6% the previous month, hinted at individuals dipping into their savings to sustain their spending levels.
The recent report from the Commerce Department underscored the stark disparity between inflation and economic growth. While the PCE surged to a 3.4% annualized rate in the first quarter, GDP growth remained subdued at just 1.6%, falling significantly short of Wall Street’s expectations. This discrepancy suggests that the Federal Reserve is likely to maintain interest rates at current levels through the summer, unless there are substantial changes in economic conditions.
Inflation has been a persistent concern for over two years, consistently surpassing the Fed’s target of 2%. The central bank closely monitors the PCE index due to its ability to adjust for changes in consumer spending patterns and its relatively lower emphasis on housing costs compared to other inflation measures.
Breaking down the components of inflation, service prices experienced a notable increase of 0.4% this month, while goods prices showed minimal movement at just 0.1%. Notably, the shift from goods to services as the primary driver of price increases since the onset of the pandemic became evident. Food prices experienced a slight decline, whereas energy costs surged by 1.2%.
Over the past year, service prices have risen sharply by 4%, while goods prices have seen only marginal growth of 0.1%. Food prices registered a modest increase of 1.5%, while energy costs spiked by 2.6%. Overall, U.S. inflation reached 2.7% for the year ending in March, surprising analysts who had anticipated a more moderate rise from 2.5% to 2.6% in February.
The disappointing report on first-quarter inflation and growth dashed hopes for immediate rate cuts, with traders now pricing in the possibility of the first cut occurring in November, following the presidential election. This poses a significant challenge for President Biden, who aims to demonstrate his administration’s ability to effectively combat inflation amidst borrowing costs reaching a 23-year peak. Given that inflation has persistently exceeded the Fed’s 2% target since March 2021, it appears that addressing these inflationary pressures will be a prolonged and challenging endeavor.