Key Fed Inflation Rising Again, Rising Chance of Rate Hike; S&P 500 shakes it off

The Federal Reserve’s primary inflation rate showed that core price pressures in April were greater than expected. Supercore inflation, or core services excluding housing, also picked up. The S&P 500 initially lost traction, but bounced back following the report, though the data reinforces the position of Fed hawks eyeing further rate hikes. Progress in talks on the debt ceiling was central.


Core inflation rate

The Personal Consumption Price Index, or PCE, rose 0.4% in April. That raised annual inflation to 4.4%, against an expectation of 4.2%.

Typically, Federal Reserve decision-making puts more weight on core inflation, dispelling volatile food and energy prices. Core prices also rose 0.4% in April, while 12-month core inflation stood at 4.7% versus the expected 4.6%.

Wall Street economists expected a 0.3% monthly increase for both the overall PCE price index and core prices.

Fed Focus: Supercore Services Inflation

Starting late last year, Federal Reserve Chairman Powell shifted the focus on inflation to core PCE services excluding housing, or supercore services. This is in line with the Fed’s view that the tight labor market and high wage growth are at the root of stubbornly high inflation. Wages make up a high percentage of costs for service companies. Therefore, inflation of supercore services should decrease as wage pressures ease.

April PCE data for these services, such as healthcare, haircuts and hospitality, showed prices rising 0.4% month on month. The increase for March was revised slightly higher from 0.24% to 0.29%. The 12-month inflation for non-housing services decreased from 4.5% to 4.6%. Still, the trend has been better over the past three months, with supercore prices up 4.35% annually. That is the lowest since last September.

Personal income and expenses

Personal income rose 0.4% month on month, in line with forecasts of a 0.4% increase. Personal consumer spending rose 0.8%, twice expected gains, after two soft months of spending.

Chances of rate hikes by the Federal Reserve

Leading up to the PCE inflation report, markets had priced in a 41% chance of a quarter-point rate hike at the June 13-14 Federal Reserve meeting. That jumped to 58.5% after the PCE data. Markets now see a 77% chance of a hike from the July 25-26 Fed meeting.

S&P 500

The S&P 500 rose 0.6% in early Friday stock market action after futures briefly turned negative following inflation data. Futures were up amid marked progress towards a debt ceiling agreement.

A debt-ceiling deal doesn’t necessarily pave the way for an extended S&P 500 rally. Fading fiscal support and further tightening by the Fed, unloading assets it bought during the pandemic, could prove a damper.

Be sure to read IBD’s daily afternoon The Big Picture column to stay in sync with the market’s underlying trend and what it means for your trading decisions.


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