Summary: US Fed’sfavoured inflation measure up 0.4% in February; below expectations; annual rate accelerates from 5.2% to 5.4%; 2-year Treasury yield up, longer-term yields down; expectations of Fed rate rises 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 ran up well above the Fed’s target.
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 0.4% over the month, less than the 0.6% which had been generally expected and January’s 0.5% increase. On a 12-month basis, the core PCE inflation rate accelerated from January’s 5.2% to 5.4%.
US Treasury bond yields rose at the short end but rose elsewhere along the curve on the day. By the close of business, the 2-year Treasury bond yield had gained 3bps to 2.34%, the 10-year yield had slipped 1bp to 2.34% while the 30-year yield finished 3bps lower at 2.45%.
In terms of US Fed policy, expectations of a higher federal funds rate over the next 12 months softened a little. At the close of business, May contracts implied an effective federal funds rate of 0.725%, 40bps higher than the current spot rate. August contracts implied a rate of 1.555% and March 2023 futures contracts implied 2.605%, 238bps above the spot 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.