February PCE Inflation Rate Falls Below Expectations, Core PCE Up 4.6%

The latest report from the Bureau of Labor Statistics shows that the personal consumption expenditures (PCE) index rose by 0.3% from the previous month and 5% on an annual basis. The PCE price index, which is the Federal Reserve's preferred measure of inflation, came in below expectations that called for a 0.4% rise. It was anticipated that the PCE inflation rate for a period of 12 months would decrease to 5.1%.[0] Core PCE, which excludes volatile food and energy prices, was up 4.6%, below analyst estimates of a 4.7% gain. The softer inflation readings did not immediately have much impact on the outlook for a Fed rate hike on May 3, as markets are still pricing in 48% odds of a quarter-point hike.

The personal consumption expenditures price index excluding food and energy increased 0.3% for the month, below the 0.4% Dow Jones estimate and lower than the 0.5% January increase. Further, personal spending rose 0.2% in February after January's upwardly revised 2% jump. After accounting for inflation, there was a 0.1% decline in spending on both goods and services.[1] Consumer spending rose 0.2% in February, representing a sharp cooldown from January’s hot reading, according to the report.[2] After factoring in inflation, there was a 0.1% decrease in monthly actual spending.[2] The report contains additional statistics indicating that consumer spending in February saw only a slight increase of 0.2%, when compared to the significant 1.5% surge observed in January. Last month, economists predicted an increase of 0.3% in personal spending.

The Federal Reserve's preferred measure of inflation shows prices rose at a slower pace in February, as consumers backed off on spending and income gains cooled. The PCE headline figure is still far above the Fed's comfort zone, and it could take an abrupt rise in jobless claims or more evidence of bank fragility to avoid one further rate hike on May 3.[1] Fed Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation, and both the core and headline numbers point to inflation that is running well above the Fed's preferred 2% target.

The report also showed that personal incomes grew 0.3% last month and the personal savings rate, which is personal savings as a percentage of disposable personal income, gained 0.2 percentage points to 4.6%.[3] At the same time, the 2-year Treasury yield saw an increase of 2 basis points, reaching 4.12%. The yield for the U.S. 2 Year Treasury (US2Y) increased by 2 basis points to 4.11%, whereas the U.S. 10 Year Treasury yield (US10Y) decreased by 2 basis points to 3.52%.

Although the Fed is focusing on the PCE headline figure to bring consumer prices back to 2%, Chair Jerome Powell has stated that core data provides a more accurate indication of inflation to reporters. The core and headline figures indicate that inflation is exceeding the Federal Reserve's desired target of 2%.[4] However, the softer inflation readings may provide some hope that interest rate hikes are helping ease price increases.

0. “Markets Today: Stock Indexes Rally as U.S. Price Pressures Moderate” Barchart, 31 Mar. 2023, https://www.barchart.com/story/news/15589932/markets-today-stock-indexes-rally-as-u-s-price-pressures-moderate

1. “Fed's Key Inflation Rate Cooled In February; S&P 500 Rises” Investor's Business Daily, 31 Mar. 2023, https://www.investors.com/news/economy/fed-key-inflation-rate-cooled-in-february-sp-500

2. “The Fed's favorite inflation measure cooled in February” CNN, 31 Mar. 2023, https://www.cnn.com/2023/03/31/economy/pce-inflation-february/index.html

3. “Key Fed inflation gauge rose 0.3% in February, less than expected” CNBC, 31 Mar. 2023, https://www.cnbc.com/2023/03/31/fed-inflation-gauge-february-2023-.html

4. “Fed's favorite inflation gauge eases slightly in February, but prices remain high” Fox Business, 31 Mar. 2023, https://www.foxbusiness.com/economy/feds-favorite-inflation-gauge-eases-slightly-february-prices-remain-high

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