Summary: US core PCE price index up 0.3% in March, in line with expectations; annual rate slows from 4.7% to 4.6%; ANZ: “Fed will remain guarded”; Treasury yields fall; Fed rate-rise expectations for next two months unchanged.
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 above the Fed’s target.
The latest figures have now been published by the Bureau of Economic Analysis as part of the March personal income and expenditures report. Core PCE prices rose by 0.3% over the month, in line with expectations as well as February’s increase. On a 12-month basis, the core PCE inflation rate slowed from February’s revised rate of 4.7% to 4.6%.
“The trend in ex-shelter services PCE data suggest that the Fed will remain guarded,” said ANZ rates strategist Jack Chambers.
US Treasury bond yields fell on the day. By the close of business, the 2-year Treasury bond yield had lost 7bps to 4.00%, the 10-year yield had shed 5bps to 3.42% while the 30-year yield finished 7bps lower at 3.68%.
In terms of US Fed policy, expectations of a higher federal funds rate over the next two months remained unchanged while expectations of rate cuts further out hardened. At the close of business, contracts implied the effective federal funds rate would average 5.03% in May, 20bps higher than the current spot rate, and then move up to an average of 5.08% in June. July futures contracts implied a 5.10% average effective federal funds rate while May 2024 contracts implied 3.82%, 101bps 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.