Keep the Faith on Inflation, But Prepare to Be Disappointed

There were a couple of ways that the latest inflation data could have gone, and Friday’s result was clearly the most positive of the not-great potential outcomes. Following a hot quarterly inflation print on Thursday, investors learned from the monthly numbers that most of the heat came at the start of the year. Yesterday’s news, in other words. Still, it’s become clear that markets may have to brace for a few more months of disappointment, and that the data will probably keep the Federal Reserve’s policy rate at its current 5.25%-5.5% for most of 2024.

The Bureau of Economic Analysis said Friday that its core personal consumption expenditures deflator — the Fed’s preferred inflation gauge — rose 0.32% in March from the previous month, with January’s number revised up to 0.5% and February coming in a hair higher at 0.27% (I’m going to the second decimal place because such is the level of scrutiny and handwringing around these numbers.) From a momentum standpoint, it’s a welcome development that the worst of the problem is now a full three months behind us, leaving year-on-year core PCE at 2.8% (about 80 basis points above the Fed’s target of 2%). Not exactly a hyperinflationary crisis!

less bad inflation