Key Fed Inflation Rate Heats Up Again, Raising Odds of Rate Hikes; The S&P 500 is shaking it off

The Federal Reserve’s headline inflation rate showed that core price pressures were hotter than expected in April. Supercore inflation, or core services excluding housing, also increased. The S&P 500 initially lost traction, then pulled back after the report, although the data bolstered the position of Fed hawks eyeing another rate hike. Progress in the negotiations on the debt ceiling took center stage.


Core inflation rate

The price index for personal consumption, or PCE, rose 0.4% in April. That lifted the annual inflation rate to 4.4%, against expectations of 4.2%.

Typically, Federal Reserve decisions place more weight on core inflation, which strips out volatile food and energy prices. Core prices also rose 0.4% in April, while the 12-month core inflation rate came in at 4.7% against an 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

From late last year, central bank chairman Powell shifted the inflation focus to core PCE services excluding housing, or super-core services. It is in line with the Fed’s view that the tight labor market and high wage growth are the cause of stubbornly high inflation. Wages make up a high percentage of costs for service companies. Therefore, inflation in super-core services should decrease as wage pressures ease.

April PCE data for these services, such as health care, haircuts and hospitality, showed prices rose 0.4% on the month. The increase for March was revised somewhat higher to 0.29% from 0.24%. The 12-month core non-housing services inflation rate rose to 4.6% from 4.5%. Still, the trend over the past three months has been better, with super core prices up 4.35% at an annualized rate. It is the lowest since September last year.

Personal income and expenses

Personal income rose 0.4% in the month, corresponding to forecasts of an increase of 0.4%. Personal consumption expenditures rose 0.8%, double the expected gain, after two soft months of spending.

Odds for interest rate hikes at the Federal Reserve

Ahead of the PCE inflation report, markets were pricing in 41% odds of a quarter point rate hike at the Federal Reserve meeting on 13-14. June. It jumped to 58.5% after the PCE data. The markets now see a 77% chance of an increase at the Fed meeting on 25-26. July.

S&P 500

The S&P 500 rose 0.6% early Friday, after futures briefly turned negative following the inflation data. Futures had risen amid apparent progress towards a deal with the debt ceiling.

A debt ceiling deal will not necessarily clear the way for an extended S&P 500 rally. Easing fiscal support and further tightening by the Fed, by offloading assets it bought during the pandemic, could prove a downside.

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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