The Fed’s headline inflation rate showed that core price pressures were lower than expected in March as the US economy slowed. However, as the Federal Reserve prepares to decide whether to raise interest rates next Wednesday, the Labor Department reported that worker wages showed surprising strength in the first quarter. After the data, the S&P 500 turned positive, building on Thursday’s strong rally.
A high rate of core inflation
The personal consumption expenditures, or personal consumption expenditures, price index rose 0.1% in March, lowering the annual inflation rate to 4.2%, in line with expectations.
However, the core rate of personal consumption expenditures inflation, which excludes food and energy, rose 0.3% last month. Core inflation came in at 4.6%, above expectations of 4.5%. The higher-than-expected core annual inflation rate reflects the upward revision to January data, which saw core PCE prices rise by a revised 0.6% in the month.
On Thursday, the Commerce Department reported that the personal consumption expenditures price index rose at an annualized rate of 4.2% in the first quarter with inflation confirmed from a rate of 3.7% in the fourth quarter. The Fed is paying more attention to core PCE inflation, which came in at 4.9% in the first quarter, up from 4.4% in the fourth and 4.7% in the previous two quarters. But we now know that the bout of inflation occurred in January and didn’t seem to last.
In fact, there was some good news regarding services inflation, with the exception of housing and energy services, which Fed Chairman Jerome Powell highlighted as key to the broad inflation outlook. Prices for these services, such as healthcare, hair cutting and hospitality, rose just 0.24% in March, down from 0.36% in February and 0.55% in January. The annual inflation rate for non-residential basic services eased to 4.5% from 4.8%.
Since wage growth accounts for a high proportion of service business costs, inflation for non-residential essential services is expected to move in tandem with wages.
labor cost index
The Employment Cost Index, the Fed’s preferred reading of wage trends, showed compensation rising 1.2% in the first quarter, versus an upwardly revised 1.1% in December and beating expectations of 1%. Compensation grew 4.8% from last year, but wages and salaries increased 5.1% with benefits increasing 4.3%.
Fed Chairman Powell said wage growth of 3.5% is consistent with the inflation target of 2%.
Economists pay close attention to the wages and salaries of workers in occupations that are not oriented heavily to fluctuating incentive wages, such as commissions. Excluding incentive occupations, wages and salaries increased 5% from a year ago, unchanged from the fourth quarter.
On Thursday, the Labor Department reported that new claims for unemployment benefits fell by 16,000 to 230,000 in the week ending April 22. This dropped the four-week average of claims to 236,000 from 240,000. But that’s still up 24% since late September.
The data also shows that the unemployed have difficulty finding jobs. The number of people who continued to receive benefits in the week of April 15 decreased by 3,000 to 1.858 million. But this jumped steadily from 1.29 million in September.
GDP is slowing
Real GDP rose at an annualized rate of 1.1% in the first quarter, down sharply from 2.6% in the fourth quarter and well below estimates of 2%.
The slowdown came as business equipment investment declined at an annualized rate of 7.3%, worse than the previous quarter’s 3.5% decline. Private inventories fell by $138 billion after an increase of $98 billion in the fourth quarter. This reversal subtracted 2.3 percentage points from GDP growth, which almost completely offset the 2.5 percentage point rise from stronger PCE.
Chances of a Fed rate hike
Although jobless claims show that the robust labor market has taken a definite turn for the worse, the Fed may raise the key interest rate on May 3.
After Friday’s PCE inflation and ECI data, markets were pricing at 83% odds of a quarter-point increase, down from 84% on Thursday.
Far from triggering another banking crisis, a rate hike looks like a done deal. However, shares First Republic Bank (FRC) continued to unravel on Friday as the FDIC was reportedly in discussions about the bank’s fate.
S&P 500 is trying to rally
The S&P 500 rose 0.3% to 4,146 on Friday morning. But that came after a session on Thursday in which the S&P 500 rose just under 2%, buoyed by strong earnings from Meta platforms (meta).
The S&P 500 has closed in a narrow trading range between 4050 and 4170 over the past month, holding above the 50-day moving average. There must be a higher or lower fracture.
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