Summary: US core PCE price index up 0.3% in February, in line with expectations; annual rate slows to 2.8%; Treasury yields rise; Fed rate-cut expectations soften.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since increased significantly and still remains above the Fed’s target even after recent declines.
The latest figures have now been published by the Bureau of Economic Analysis as part of the February personal income and expenditures report. Core PCE prices rose by 0.3% over the month, in line with expectations but down from January’s 0.5% increase after it was revised from 0.4%. On a 12-month basis, the core PCE inflation rate slowed from January’s revised rate of 2.9% to 2.8%.
US Treasury bond yields generally rose on the day. By the close of business, the 2-year Treasury bond yield had gained 5bps to 4.62%, the 10-year yield had added 2bps to 4.21% while the 30-year yield finished unchanged at 4.35%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened, although several cuts are still factored in. At the close of business, contracts implied the effective federal funds rate would average 5.30% in May, 3bps below the current spot rate, 5.215% in June and 5.16% in July. March 2025 contracts implied 4.41%, 92bps less than the current rate.
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.