Has Inflation Peaked? Fed’s Favorite Indicator Says Maybe So—Despite Another ‘Startling’ Reading

Topline

Two key inflation readings on Friday showed mixed signs for the overall economy, with the Federal Reserve’s favorite indicator suggesting the worst of rising prices may be in the past while another closely watched metric posted a stronger-than-expected spike.

Key Facts

On Friday morning, the core personal consumption expenditures index, which measures the price of goods and services paid by consumers, jumped 5.2% in March, coming below average economist expectations of 5.3% and falling on a monthly basis for the first time since October 2020, the Commerce Department reported.

“Core inflation has peaked, and this is the start of a run of bigger declines,” Pantheon Chief Economist Ian Shepherdson wrote in a Friday email about the reading (which the Fed uses to gauge overall inflation), pointing out softening vehicle prices could help usher in a “significant moderation” in inflation within the coming months.

However, it wasn’t all good news: In a separate release on Friday, the Labor Department reported employment costs jumped 1.4% in the first quarter, much higher than average expectations of 1.1% due to increases in benefits, which include paid time off, pensions and healthcare.

“The number is startling, but might be a one-time spike,” Shepherdson said, adding that the data will likely have no immediate effect on Fed policy, but could make a 50-basis-point rate hike in June—on the higher end of forecasts—more likely.

In another potentially concerning sign for the economy, the personal savings rate fell to 5.2% in March, hitting its lowest point since 2013, according to the Commerce Department.

Stocks fell immediately after the releases, with the Dow Jones Industrial Average trading down 50 points, or 0.2%, by about 10 a.m. ET.

Crucial Quote

“Now the question is whether genuine disinflation happens or simply a plateauing,” analyst Adam Crisafulli of Vital Knowledge Media said in a Friday note. “If it’s just the latter, it may not provide too much relief to stocks or the market, whereas the former would represent a huge shift in the narrative.”

Key Background

The reopening economy, fiscal stimulus and historically low interest rates helped fuel one of the strongest starts to a bull market ever during the pandemic, but stocks have struggled this year as the Fed raises rates and unwinds economic support to ease decades-high inflation. After rising 27% in 2021, the S&P has fallen 11% this year, while the Nasdaq has flirted with bear-market territory, plummeting as much as 21%. “A repricing of stocks is currently taking place due to rising interest rates, which mathematically makes stocks less attractive,” explains David Bahnsen, chief investment officer of $3.6 billion advisory The Bahnsen Group.

What To Watch For

In a Friday note to clients, Bank of America economist Ethan Harris said the key risk to the economy is that inflation remains elevated next year. “Recession risks are low now, but elevated in 2023 as inflation could force the Fed to hike until it hurts,” he said. The next major inflation reading is due in the consumer price index report on May 11.

Further Reading

U.S. Economy Shrank 1.4% Last Quarter In Worst Showing Since Covid Recession, New GDP Estimate Shows (Forbes)

Bear Market Looms As ‘Relentless Selling’ Batters Stocks—Not Even Lower Inflation Can Help Now (Forbes)

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