The inflation rate most closely watched by the Federal Reserve showed that price pressures were a bit tamer in May, as core inflation, excluding food and energy prices, eased. Meanwhile, new claims for jobless benefits dipped by 2,000, consistent with a strong but gradually softening job market. The data came amid a renewed bout of selling for the Dow Jones Industrial Average, S&P 500 and Nasdaq, as investors worry that Federal Reserve tightening will bring a recession.
Despite the better-than-expected inflation data, the Dow Jones and other major indexes remained solidly lower in early Thursday stock market action.
The PCE (personal consumption expenditures) price index rose 0.5% on the month as the annual inflation rate held at 6.3%. The PCE inflation rate remained below March's 40-year high of 6.6%. Core prices, minus food and energy, rose 0.3% on the month. The annual core inflation rate eased to 4.7%, continuing to recede from February's 5.3% reading, which was the highest since 1983.
Consumer Spending Softens
The Commerce Department's personal income and spending report also showed that consumer spending may be softening. Overall spending rose just 0.2%, vs. estimates of 0.5%. That came as goods spending fell 0.7%, but the bigger services category saw a 0.7% rise. Spending for April was revised down to a 0.6% gain from the initially reported 0.9%.
After the data, IHS Markit said that Q2 GDP is now tracking toward a 0.7% decline. Before the "considerably weaker" consumption data, the firm said GDP was tracking toward a 0.8% increase.
Jobless Claims
Also on Thursday, the Labor Department said new claims for jobless benefits fell 2,000 to 231,000 in the week through June 25. Layoffs are at historically very low levels, but they've moved up from 50-year lows near 170,000 in March.
Inflation and, to a lesser extent, the labor market have overshot the Federal Reserve's goal of price stability and maximum employment. Federal Reserve chief Jerome Powell told Congress last week that policymakers' commitment to restore price stability is "unconditional," meaning they'll do so even if it causes a recession. Increasingly, Wall Street thinks that is the most likely outcome.
PCE Inflation Rate
Economists expected the PCE price index to rise 0.7% on the month and 6.5% from a year ago. The core PCE price index, stripping out food and energy, was seen rising 0.4% from January, with the annual PCE inflation rate easing to 4.8%.
Goods prices rose 9.6% from a year ago in May, as food prices rose 11% and energy prices 35.8%. Still goods inflation has eased from a peak of 10.6% in March. Yet services inflation picked up to 4.7% from 4.6% the prior month, suggesting that broad inflation pressures haven't eased significantly.
Fed projections show the core PCE inflation rate easing to 4.3% by year end. That means roughly 0.35% monthly average increases will keep inflation on track.
But Powell has said that inflation and inflation pressures will have to come down in a convincing way for the Fed to step back from its accelerated pace of tightening.
Already a 75-basis-point move at the July meeting is seen as a lock.
S&P 500 Reaction To Inflation Report
Despite the better-than-expected inflation data, stocks failed to muster a rally in early Thursday action. The Dow Jones fell 1.8%. The S&P 500 lost 2% and the Nasdaq composite 2.6%.
Through Wednesday's close, the Dow has fallen 15.7% from its all-time closing high, while the S&P 500 is down 20.4% and the Nasdaq 30.4%.
Bottom line: Investors should take their cues from the stock market. Make sure to read IBD's daily afternoon The Big Picture column to stay on top of underlying market trends and what they mean for your trading decisions.
Treasury yields continued their recent pullback, with the 10-year yield slipping 5 basis points to 2.04%.
