U.S. Inflation Comes In As Expected

U.S. equity and bond markets were closed on Friday in observance of Good Friday, but that didn’t stop the U.S. government from releasing its latest Personal Consumption Expenditures Index (PCE). Considering that this is the Federal Reserve’s favorite measure of inflation that will leave markets catching up on Monday.

Fortunately the report shouldn’t cause much disruption in markets as it came in right as expected, showing annual PCE inflation of 2.8%. That leaves expectations for Fed rate cuts unchanged, with a 70% chance of a cut at the June meeting, and then two more cuts by the end of 2024. Of course that could change, given that inflation is not yet at the 2% target mandated by the Fed.

On a monthly basis the PCE showed a 0.3% increase, and when stripping out volatile food and energy prices, called the core PCE, the rise was a more modest 2.5% on an annual basis. The Fed does consider the core PCE as a more important measure, but takes both values into account. Core PCE hasn’t dropped to the 2% level or below in three years, though it has been trending lower.

Analysts believe markets will move quickly past these expected PCE readings and focus immediately on the upcoming non-farm labor numbers due out at the end of next week. If those come in as weaker than expected it could well offset a bit of stickiness in the inflation data.

Rising energy costs, which were up by 2.3% contributed to the headline PCE reading. Goods inflation, which came in at 0.5% was also a contributing factor, though service inflation dropped to 0.3% versus the 3.8% level seen at the same time last year.