Week of June 3, 2024
Here we are through the first five months of 2024, and you could say the more things change, the more they stay the same. What exactly do we mean, you might ask? Well, the stock and bond markets continue to hang on every inflation number that is reported. Unfortunately, when you have a monetary policy that is emphasizing the importance of being data dependent, this situation is not likely going to change any time soon.
Interestingly, when trying to decipher inflation trends, the markets’ primary focus tends to be more on CPI data, while the Fed’s preferred measure is the PCE Deflator. In fact, it is the latter gauge of price pressures the Fed actually provides forecasts for, not CPI. However, the market can be forgiven for turning to the CPI numbers because this report does come out weeks before the PCE Deflator data, and arguably, it is the most widely known inflation report the public receives.
With the next Federal Open Market Committee (FOMC) meeting slated for next week, we thought it would be prudent to offer some insights on the recently released PCE Deflator, specifically the core measure. That way, you can “play along with the Fed” because this is the data the policy maker will be analyzing as well for their updated forecasts.
For April, the monthly increase came in at +0.2%, which was directly in line with consensus estimates. The bond market cheered this result for two reasons. First, the report did not come in “hotter” than expected, and secondly, the monthly gain represented a -0.1 pp drop from the prior month’s reading.
While we don’t want to be accused of pouring cold water on the market, some perspective is surely needed when the bar is set that low for the bond market. In actuality, if you look at the last three months, you discover that the monthly increases haven’t really changed that much at all. Indeed, through the February–April period, the monthly gains were all +0.3% if you utilize basic rounding math (February: +0.27%, March +0.33%, April: +0.25%).
Let’s now turn our attention to the year-over-year reading. For April, the Bureau of Economic Analysis (BEA) reported that the core measure rose +2.8%. This number certainly looks a lot better than the peak 2022 increase of +5.6%, but the improvement witnessed throughout last year in particular has seemingly come to a halt, at least for now anyway. To provide some perspective, core PCE has now been at +2.8% for three months in a row after being at +2.9% for the two months prior. In other words, year/year inflation has been basically unchanged since December of last year.
From Powell & Co’s. vantage point, the statistical trend we just laid out is not what they have been hoping for. In fact, the “last mile” in this inflation marathon is definitely proving to be the most difficult for the Fed as it tries to attain its “2%” goal.
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