The Federal Reserve's primary inflation rate showed that core price pressures ran hotter than expected in April. Supercore inflation, or core services excluding housing, also increased. The S&P 500 initially lost traction, then regained its stride after the report, though the data bolsters the position of Fed hawks eyeing a further rate hike. Progress in debt-ceiling talks took center stage.
Core Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.4% in April. That lifted the annual inflation rate t0 4.4%, vs. expectations of 4.2%.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. Core prices also rose 0.4% in April, while the core 12-month inflation rate came in at 4.7% vs. the 4.6% expected.
Wall Street economists expected a 0.3% monthly increase for both the overall PCE price index and core prices.
Fed Focus: Supercore Services Inflation
Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That's in keeping with the Fed's view that the tight labor market and elevated wage growth are at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
April PCE data for for these services, such as health care, haircuts and hospitality, showed prices rose 0.4% on the month. The increase for March was revised slightly higher to 0.29% from 0.24%. The 12-month inflation rate for core nonhousing services eased to rose to 4.6% from 4.5%. Still, the trend over the past three months has been better, with supercore prices up 4.35% at an annual rate. That's the lowest since last September.
Personal Income And Spending
Personal income rose 0.4% on the month, matching forecasts of a 0.4% rise. Personal consumption expenditures rose 0.8%, twice the expected gain, after two soft months of spending.
Federal Reserve Rate Hike Odds
Ahead of the PCE inflation report, markets were pricing in 41% odds of a quarter-point rate hike at the June 13-14 Federal Reserve meeting. That jumped to 58.5% after the PCE data. Markets now see a 77% chance of a hike by the Fed meeting on July 25-26.
S&P 500
The S&P 500 rose 0.6% in early Friday stock market action after futures briefly turned negative after the inflation data. Futures had been rising amid apparent progress toward a debt-ceiling deal.
A debt-ceiling deal won't necessarily clear a path for an extended S&P 500 rally. Fading fiscal support and further Fed tightening, by unloading assets it purchased during the pandemic, could prove to be a downer.
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