The Federal Reserve’s key inflation rate eased more than feared in March as the U.S. economy slowed, easing key price pressures. As the central bank is set to decide whether to raise interest rates next Wednesday, the Labor Department said wages showed surprising strength in the first quarter. After the data, the S&P 500 turned positive, creating a strong rally Thursday.
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The core inflation rate rises
The personal consumption expenditures, or PCE, price index fell 0.1% in March, bringing the annual inflation rate down to 4.2%, matching expectations.
However, the core PCE inflation rate, which strips out food and energy, rose 0.3% last month. The core inflation rate came in at 4.6%, above expectations of 4.5%. The higher-than-expected core annual inflation rate reflected upward revisions to January data, which saw core PCE prices revised 0.6% over the month.
On Thursday, the Commerce Department reported that the PCE price index rose at a 4.2% annualized rate in the first quarter as inflation firmed from Q4’s 3.7% rate. The central bank paid more attention to the core PCE inflation rate, which reached 4.9% in Q1, up from 4.4% in Q4 and 4.7% in the previous two quarters. But we now know that the warming of inflation happened in January and did not last.
In fact, with the exception of housing and energy services, there was some good news regarding services inflation, which Fed President Jerome Powell highlighted as important to the broader inflation outlook. Prices for these services, such as health, hairdressing and hospitality, rose just 0.24% in March, compared to 0.36% in February and 0.55% in January. The annual inflation rate for core homelessness services decreased from 4.8% to 4.5%.
As wage growth makes up a larger percentage of spending for service businesses, inflation in core non-housing services is expected to move in tandem with wages.
Employment Cost Index
The central bank’s preferred employment cost index of wage trends showed compensation rose 1.2% in Q1, an upwardly revised 1.1% in December and beating expectations by 1%. Compensation rose 4.8% from a year ago, but wages and salaries rose 5.1% as benefits rose 4.3%.
Federal Reserve Chairman Powell said 3.5% wage growth is consistent with the 2% inflation target.
Economists pay close attention to wages and salaries for workers in industries that are not amenable to variable incentive pay, such as commissions. Excluding incentive-paid occupations, wages and salaries rose 5% from a year ago, unchanged from Q4.
Unemployment claims
The Labor Department said on Thursday that new claims for unemployment benefits fell by 16,000 to 230,000 in the week to April 22. This lowered the four-week average claims to 236,000 from 240,000. But that’s up 24% from the end of September.
The data also shows that the unemployed are finding it difficult to find work. The number of people receiving regular benefits fell by 3,000 to 1.858 million in the week of April 15. But it has steadily risen from a low of 1.29 million in September.
GDP decreases
Real GDP rose at a 1.1% annual rate in the first quarter, a sharp drop from 2.6% in Q4 and below estimates of 2%.
The slowdown came as business equipment investment fell at a 7.3% annual rate, worse than the previous quarter’s 3.5% decline. Private reserves fell by $138 billion after a $98 billion increase in Q4. That reversal subtracted 2.3 percentage points from GDP growth, which almost fully offset a 2.5-percentage-point boost from stronger personal consumption spending.
Fed Rate Hike Odds
The Fed is likely to raise its key rate on May 3, even as jobless claims show a strong labor market has taken a clear turn for the worse.
After Friday’s PCE inflation and ECI data, markets priced in 83% odds of a quarter-point rise from 84% on Thursday.
Short of another banking-crisis outbreak, the rate hike looks like a done deal. However, stocks First Republic Bank (FRC) continued to slide on Friday as the FDIC reportedly discussed the bank’s fate.
The S&P 500 is trying to rally
The S&P 500 rose 0.3% to 4,146 on Friday morning. But that followed a Thursday session in which the S&P 500 rallied less than 2%, helped by strong earnings. Meta platforms (Meta)
The S&P 500 has been locked in a tight trading range between 4050 and 4170 over the past month, above its 50-day moving average. A break will happen more or less.
Be sure to read IBD’s The Big Picture every day to stay in tune with the market’s underlying trend and what that means for your trading decisions.
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