The core personal consumption expenditure price index (Core PCE prices) in the US, which exclude food and energy, rose by 0.6% versus 0.4% expected. Last month 0.4% revised up from 0.3%. The annual rate, the Federal Reserve’s preferred gauge of inflation came in at 4.7% vs 4.3% expected, noticeably the 4.4% prior revised up to 4.6%. The markets recognized that there isn’t disinflation in this report. There is inflation in it and reacted swiftly to fears of more aggressive Fed action. The US dollar and benchmark Treasury yields gained, while stock futures declined, as investors digested the gauge of inflation favored by the Federal Reserve.
The report reminded us of stagflation risk, real spending fell while the inflation rates were still too high for the Fed’s liking. Federal Reserve Governor Chairman Powell reminded us at the FOMC that the Fed’s key influence or measure for inflation is the core PCE index.
Market Reaction
Immediately Following the report;
- S&P 500 futures are down 42 points, trading 1.0% below fair value.
- Nasdaq 100 futures are down 160 points, trading 1.3% below fair value.
- Dow Jones Industrial Average futures are down 311 points, trading 0.9% below fair value.
- 2-yr: +8 bps to 4.77%
- 3-yr: +8 bps to 4.49%
- 5-yr: +8 bps to 4.19%
- 10-yr: +5 bps to 3.93%
- 30-yr: +2 bps to 3.90%
The PCE price index is closely watched since it is the preferred inflation measure of the Federal Reserve, which began raising interest rates for the first time since the pandemic began to tamp down rising prices. The Fed has traditionally tended to focus on the PCE price index because it gives a more complete picture of consumer prices, while the public and many investors tend to be more aware of the Labor Department’s CPI figure.
The market seems to go through phases of trading on the premise that the US is at or close to, peak inflation. The shock will come if better inflation news in coming months is not coming.
Highlights
Core PCE Index January 2023
- US PCE Core Deflator (M/M) Jan: 0.6% (est 0.4%; prev 0.3%)
- US PCE Core Deflator (Y/Y) Jan: 4.7% (est 4.3%; prev 4.4%)
- Core-PCE Price Index, which excludes food and energy, increased MoM 0.6% versus 0.4% expected. Last month 0.4% revised up from 0.3%
- On a year-over-year basis, the core-PCE Price Index was up 4.7% vs 4.3% expected. 4.4% prior revised up to 4.6
PCE Index January 2023
- US PCE Deflator (M/M) Jan: 0.6% (est 0.5%; prev 0.1%)
- US PCE Deflator (Y/Y) Jan: 5.4% (est 5.0%; prev 5.0%)
- The cost of goods went up 0.6 percent, recovering from a 0.5 percent fall in the previous month
- Service inflation was steady at 0.6 percent.
- Food prices went up 0.4 percent, the same as in December and energy prices surged 2 percent, after falling 3.6 percent.
US Personal Income and Spending January 2023
- US Personal Income Jan: 0.6% (est 1.0%; prevR 0.3%)
- US Personal Spending Jan: 1.8% (est 1.4%; prevR -0.1%)
- US Real Personal Spending Jan: 1.1% (est 1.1%; prev -0.3%)
PCE Price Index
CPI v PCE Inflation?
The two inflation measures have different weightings. The CPI captures out-of-pocket expenditures by urban consumers. The PCE price index is broader, including spending on behalf of households, for example, employer-sponsored healthcare plans, Medicare and Medicaid. The PCE price index as a result has a heavier weight for healthcare prices. Meanwhile, housing costs account for a much bigger share of the CPI than the PCE price index.
Source: US Bureau of Economics
From The TradersCommunity News Desk