Latest Inflation Numbers Suggest No May Rate Cut

The personal income and outlays data — the information with probably more sway for the Federal Reserve than CPI inflation — is out from the Bureau of Economic Advisors. The news is a mixed collection.

The core PCE (personal consumption expenditures) index, excluding food and energy, grew at an expected 0.3% month over month and an annual 2.8%. The overall PCE index was also up at 0.3% versus the median forecast of 0.4%, the latter surveyed and calculated by Dow Jones and the Wall Street Journal. “Prices for goods increased 0.5 percent and prices for services increased 0.3 percent. Food prices increased 0.1 percent and energy prices increased 2.3 percent,” the BEA wrote.

Personal income, expected to grow by 0.4%, was up 0.3%, or $66.5 billion. Personal spending came in hot at a month-over-month 0.8% rather than the median forecast of 0.5%, and much higher than January’s 0.2% growth.

And yesterday, the second GDP revision for the last quarter of 2023 was 3.4% versus the previous 3.2%.

“The $145.5 billion increase in current-dollar PCE in February reflected an increase of $111.8 billion in spending for services and a $33.7 billion increase in spending for goods,” the BEA wrote. “Within services, the largest contributors to the increase were financial services and insurance (led by financial service charges, fees, and commissions), transportation services (led by air transportation), and housing and utilities (led by housing). Within goods, the largest contributor to the increase was spending for motor vehicles and parts (led by new light trucks).”

Scott Anderson, chief U.S. economist at BMO Capital Markets Economic Research, said in an emailed note that while PCE inflation moderated even as spending jumped, “inflation is still not as tame as the Fed would like to trigger an imminent rate cut decision. The three-month annual rate on core inflation is running at an elevated 3.5%, up from 2.9% over the last six months, while the supercore metric, services excluding energy and housing, is even hotter at 4.5% over the last three months compared to 3.8% over the last six months.” He also said that “strong job growth and better weather” likely contributed to the increased spending.

But the personal savings rate went from 4.1% to 3.6% because of the spending increases, which raises the question of whether consumers will eventually get into trouble with higher levels of borrowing. And Anderson thought that lower savings would have a negative impact on spending in the second quarter.

“Despite the monthly moderation in PCE inflation, the upward revisions to prior rates for both the headline and core measures remain a black mark on the Fed’s goal of returning to the 2.0% inflation target,” Anderson wrote. “In short, it will take more evidence of inflation moderation in the months ahead to give the Fed the confidence to pull the trigger on its first rate cut this year.”

So, say goodbye to May and possibly June. Some at the Fed, like Board Governor Christopher Waller, think that being slower on reducing rates would be wise. In a speech at the Economic Club of New York, he said, “In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data. This reflects the reality of managing an outlook in real time as data comes in. Subsequent data may well alter this outlook again, but we shall see. Based on what we know now, there is no urgency in taking that step.”