The Federal Reserve's preferred measure of U.S. inflation slowed again last, data indicated Friday, but the pace of declines continues to undershoot forecasts, suggesting further rate hikes are likely on the cards as the central bank grapples with stubborn price pressures.
The March core PCE Price Index rose 4.6% from last year, down from the revised 4.7% pace recorded in February but coming in higher than consensus Street forecast of 4.5%. The core index was up 0.3% on the month, the Bureau of Economic Analysis reported, matching both last month's pace and the Street consensus forecast.
The headline PCE index rose only 0.1% on the month and eased to 4.2% on the year, with both readings falling below analysts' forecasts. Personal incomes rose by 0.3% while real personal spending was unchanged to February's pace, the BEA noted, a bit firm than Street forecasts.
A separate report from the Labor Department should its closely-tracked employment cost index rose 1.2% over the first quarter, just ahead of the Street's 1.1% forecast. Private-employer wages were up 5.1% in March, the data indicated.
Commerce Department data published Thursday showed the closely-tracked core PCE price index for the first quarter, one of the Federal Reserve's favored inflation metrics, accelerated at a 4.9% pace, topping the 4.4% rate from late last year.
"A further sustained slowing requires a meaningful downshift in wage growth, which we still think is very likely, despite the disappointing Q1 ECI numbers," said Ian Shepherdson of Pantheon Macroeconomics. "Wee fully expect wage growth to slow markedly over the remainder of this year as payroll growth rolls over and unemployment rises. More immediately, though, the Fed watches the ECI closely and these data seal the deal on 25 basis point hike next week.
U.S. stocks were notably higher in early Friday trading following the data, with the Dow Jones Industrial Average rising 135 points and the S&P 500 gaining 17 points.
Benchmark 2-year Treasury note yields, which jumped to 4.07% in yesterday's session following the PCE inflation data for the quarter, were last seen trading at 4.05% while 10-year paper was pegged at 3.452%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.49% higher at 102.004.
The CME Group's FedWatch tool is now showing an 88% chance of a 25 basis point rate hike from the Fed next week in Washington, up from just 47.5% a month ago. That would take the federal funds rate to a range of 5% to 5.25%, with the bulk of bets pointing to a hold on rates in June and July.
FedWatch suggests a 39.9% chance that the federal funds rate will fall to between 4.75% and 5% at the Fed's September meeting.
"Friday's inflation report gives the Federal Reserve an excuse to hike interest rates by 25 basis points at the May meeting, even though there is a growing chorus among investors for the Fed to pause its rate hikes given worries about the economy," said Ryan Belanger, founder and managing principal at Boston-based Claro Advisors.
"As first quarter GDP confirmed, the economic growth is slowing and we believe a 2023 recession is unavoidable," he added. "Even with a recession likely on the horizon, the Fed has reiterated its commitment to fighting the inflation fire, which is why we believe that the Fed's rate hikes are not over just yet."
