After April 2021, the central bank’s preferred rate shows very low annual inflation

The Federal Reserve’s preferred rate of inflation came in lower than expected in May, a reassuring sign that the era of red-hot rates is coming to an end — but not fast enough to prevent the central bank from continuing to raise interest rates.

The core personal-consumption expenditure price index, also known as the core PCE deflator, rose 0.3% in May, down from 0.4% in April and below expectations of 0.4% among economists surveyed by FactSet. Core PCE rose 4.6% year-on-year, up from 4.7% in April and missing estimates.

Headline PCE, which includes volatile food and energy prices, rose 3.8% in May from a year earlier. The increase was the lowest since April 2021 – a sign of how much inflation has fallen since the measure peaked at 7% in June 2022.

“This is great news in the fight against inflation. “If you don’t believe inflation is happening, you’re not paying attention,” said Jamie Cox, managing partner at Harris Financial Group.

Still, inflation is well above the central bank’s 2% target. Investors expect the central bank to continue raising rates from March 2022 as it works aggressively to contain the highest rate growth in decades.

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The latest batch of PCE data, the last to be released before the central bank’s next decision at the end of July, will trigger nerves about how much the central bank will tighten monetary conditions this year. After 10 consecutive rate hikes, the central bank hit the pause button in June, but has warned that further increases may be needed.

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Investors, for their part, cheered better-than-expected data over the weekend and as markets head into the first half of 2023. By late morning, the Dow Jones Industrial Average had gained 220 points, or 0.6%. The S&P 500 rose 1.1%.

“While the immediate reaction in equity markets is positive, core inflation remains stubbornly strong,” said Quincy Crosby, strategist at LPL Financial. “The report confirms the July 26 rate hike as Jerome Powell had warned.”

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However, interest-rate futures have recently shown increased odds for rate hikes in July and September, given strong economic data and dovish comments from Federal Reserve Chairman Jerome Powell, suggesting the landscape is changing.

The odds of a quarter-point rate hike in July fell from 89% to 87% on Thursday, according to the CME FedWatch tool, which tracks federal-fund futures, with odds of rates rising to 13% from steady. 11% As of Thursday, markets were pricing in a 27% chance of a big, half-point rate hike in September, but that chance had dropped to 19% by Friday.

While there may be little inflation data ahead of the Fed’s next decision, investors will have plenty to chew on. The next big catalyst could be the jobs report for June, due July 7, as the Fed continues to monitor a tight labor market.

Write to Jack Denton at [email protected]

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