The maintenance of inflation in the United States consumer expenditure index (PCE) in March at the same level as in February, even though it is at a level that causes discomfort for the Federal Reserve (Fed, the American central bank), was received with relief by the economists.
The assessment is that, although the indicator has not brought the monetary authority’s expected confidence in the continuation of the disinflation process, at least it has not worsened to the point of putting any interest rate cuts at risk this year.
The PCE showed an increase of 0.3% in the month in both the full index and its core reading, thus remaining in the same trend as the previous month. In the 12-month period, however, the indicator went from 2.5% in February to 2.7% in March, with the core remaining at 2.8%.
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For Gustavo Sung, chief economist at Suno Research, the good news is that the data released this Friday did not exceed market expectations. On the other hand, the assessment is that “they are not sufficient to review market projections about the start of the interest rate cut”.
Suno began projecting the first cut only in September, but, in a pessimistic scenario, with less benign inflation, monetary easing could only occur in November.
“It is important to highlight that the scenario is still uncertain about the evolution of inflation and the job market. Fed President Jerome Powell signaled at an event that recent data did not give greater confidence in the start of interest cuts and, therefore, the central bank will continue to adopt a cautious stance”, he comments.
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Danilo Igliori, chief economist at Nomad, analyzes that the headline and core inflation numbers came in marginally above market projections. “The March data on consumer inflation in the US does not change the context outlined by the Fomc over the last few months and does not contribute to generating extra confidence that inflation is in fact converging sustainably towards the 2% target.”
For him, the PCE reading should only confirm the recalibration of expectations that occurred in April and now they are betting that the beginning of the cycle of interest cuts will only happen at the end of the year and that it will probably be more timid, with a reduction of something between 0.25 percentage points or 0.50 pp in the year.
Igliori, however, warns that the relatively weak GDP data for the 1st quarter, released yesterday, puts on the radar the possibility (albeit remote) of a stagflation process being created. “Resilient inflation and weak activity are all we want to avoid. This week’s data certainly increases tensions in the days leading up to the next Fomc meeting next week”, he analyzes.
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Leonardo Costa, economist ASA Investments, in turn, highlights that the quarterly annualized measure of inflation still shows acceleration in the core, which raises concern for the Fed and tends to push the bet on interest cuts for the second half of the year.
“The concern continues with the services data, which rose again at the beginning of 2024, increasing the level of concern for the Fed, which should reinforce patience and greater attention to future data.”
Observing the data
John Kerschner, Head of US Securitized Products and Portfolio Manager at Janus Henderson, comments that the start of 2024 has largely been marked by the removal of estimates of overly aggressive cuts anticipated by the Fed.
For him, Powell’s “dovish” stance at the end of 2023 was faced with persistent inflationary pressures and a more resilient and stable US growth environment. “Recently stronger than expected inflation readings have left markets nervous as rates have reached 2024 highs and are exhibiting extreme volatility. The Fed went back to ‘watching the data’ to inform its decision,” he comments.
As a result, each new inflation reading is highly important, and the market needed an “in line” reading to confirm that the Fed was not starting to lose this battle.
Kerschner says the good news is that core PCE, the Fed’s preferred measure of inflation, has confirmed that inflation persistence is holding, but is not accelerating as some feared. “The hard fact is that the Fed needs to see monthly readings averaging in the range of 0.15% to 0.20% to reach its stated target of 2%, which at this point seems a bit far away.”
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While inflation is still too high for the Fed’s comfort, if progress continues, it may still be reasonable to assume one, perhaps two, cuts in 2024. The solid employment outlook, the current strength of U.S. growth, and the slowing but persistent , inflation gives the Janus Henderson team of experts confidence that the Fed’s patience is the right approach.”
George Mateyo, chief investment officer at Key Wealth, told CNBC While the inflation reports released this morning were not as positive as feared, investors should not become overly anchored to the idea that inflation has completely cured and that the Fed will lower interest rates in the near term.
“Prospects for rate cuts remain but are not guaranteed. And the Fed will likely need weakness in the labor market before it has the confidence to cut.”
