Robust Increase in Real Spending with Core PCE Inflation at Persistently High Levels in April

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    Helmholtz Watson

    The Fed’s preferred inflation gauge, core PCE Price Index, proved higher than consensus at persistently high levels in April. The markets recognized t
    [See the full post at: Robust Increase in Real Spending with Core PCE Inflation at Persistently High Levels in April]


    Dallas Fed April trimmed mean #PCE price index +4.4% v +3.8% prior y/y
    – Core PCE ex food & energy 4.7% y/y

    “What you see in real time is closer to what you get after revision than is the case with the more conventional measure of core inflation, PCE excluding food and energy”

    Compared with ex-food-and-energy PCE inflation, the trimmed mean is subject to smaller revisions on average and, in particular, is less prone to very large revisions. The accuracy of real-time signals is likely to be important during monetary policy deliberations.


    Fed’s Mester:

    Fed has made slow progress on inflation. It’s concerning
    Says she may have to revise up her inflation projections in the next SEP in June
    Data confirms inflation is still too high
    PCE inflation underscored slow progress
    Everything is on the table for June FOMC
    Fed committed to lowering inflation in a timely way
    Hasn’t seen much sign that banking stress is affecting credit conditions
    Says she does think they will have to tighten ‘a bit more’


    Goldman Sachs economists after PCE:

    “While we continue to expect the Fed to pause deletion in June, this morning’s stronger-than-expected consumer spending and inflation data and the wide range of views by FOMC participants on the appropriate policy path make this a close call”


    Bank of America has reaffirmed its base case expectation that the Federal Reserve will not implement a rate hike in June, though the bank maintains an inclination towards a hike in the future, noting that it’s a “close call”.

    According to BofA, three conditions need to be met for a Fed rate hike:
    1) strong economic data,
    2) an increase in the debt ceiling, and
    3) subdued regional bank stress.

    The bank also believes that inflation remains too persistent for the Fed to commit to a prolonged pause in rate increases. Even if the Fed decides to forego a rate increase in June, BofA suggests that it will keep the possibility of a July hike on the table.

    The market is pricing in a 70% chance of a hike in June and a 100% chance of a hike in either June or July.

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