Daily Management Review

US Inflation Picks Up Little, Q2 Forecast Is Improved By Consumer Spending


US Inflation Picks Up Little, Q2 Forecast Is Improved By Consumer Spending
Although monthly inflation in the United States increased somewhat in March, persistently high housing and utility costs signalled the Federal Reserve would maintain high interest rates for some time.
The Commerce Department's report, released on Friday, provided some respite to financial markets rattled by concerns about stagflation after statistics released on Thursday revealed a spike in prices and a slowdown in first-quarter economic growth. The report also revealed robust consumer spending last month.
"Markets should breathe a sigh of relief this morning," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "Given the elevated levels of inflation, and this is the new normal for 2024, the market is going to need to get over hopes for Fed rate cuts."
According to the Commerce Department's Bureau of Economic Analysis, the personal consumption expenditures (PCE) price index rose 0.3% last month, mirroring the unrevised gain in February. Prices for goods increased by 0.1% as a result of lower prices for auto parts and automobiles and higher costs for apparel, footwear and petrol.
Prices for services increased by 0.4%, picking up speed from February's 0.3% gain. A 0.5% increase in the price of housing and utilities—which includes rent—boosted them. Even though there are more flats available and objective measurements indicate that rent demands are declining, rents have remained stagnant.
The data should begin to reflect these decreased rents at some point this year, according to economists. The cost of financial services and insurance increased by 0.5%, but the cost of transport services increased by 1.6%.
After increasing by 2.5% in February, inflation increased by 2.7% in the year ending in March. The rise in inflation that occurred last month was mostly predicted by experts.
Following the release of the advance GDP data for the first quarter on Thursday, which revealed that price pressures had increased to the highest level in a year, there had been concerns that inflation may surpass estimates in March.
The month of January saw the inflation surge. One of the inflation indicators that the US central bank monitors in order to meet its 2% objective is the PCE price index. Over time, monthly inflation readings of 0.2% are required to return inflation to target.
Prices for U.S. Treasury notes increased as the benchmark 10-year note's yield declined from a five-month high set earlier in the day. In contrast to a basket of currencies, the dollar strengthened as Wall Street stocks increased in value.
Next week, it is anticipated that Fed policymakers will maintain current rates. Since July, the central bank has maintained its benchmark overnight interest rate between 5.25% and 5.50%. Since March 2022, the policy rate has increased by 525 basis points.
At first, the financial markets anticipated that the first rate drop would occur in March. As statistics on the labour market and inflation continued to surprise to the upside, that estimate was moved back to June and then September.
A few analysts are still of the opinion that interest rates could drop in July due to their prediction that the labour market would contract significantly in the upcoming months. Others think that rate decreases are running out of time.
"Fed officials will likely not have enough evidence based on inflation data alone to cut rates as soon as June," said Veronica Clark, an economist at Citigroup. "But we continue to think officials will be increasingly uncomfortable leaving rates at restrictive levels for too long and will find evidence in May and June inflation data to cut rates in July."
After growing by the same unrevised margin in February, the PCE price index grew by 0.3% in March when the volatile food and energy components were excluded. March's 2.8% annual growth in core inflation followed February's increase.
Following a 0.2% increase in February, PCE services inflation, excluding energy and housing, increased by 0.4%. In March, the so-called super core inflation increased 3.5% year over year.
To assess how well they are doing in combating inflation, policymakers are keeping an eye on super core inflation.
In line with February's growth, consumer spending—which makes up over two-thirds of the U.S. economic activity—rose by a strong 0.8%.
The information was part of the GDP report, which revealed that consumer spending slowed down from the robust 3.3% rate in the October–December quarter to a still-solid 2.5% pace in the first quarter.
The increase in the trade imbalance hindered the economy's 1.6% growth rate in the previous quarter. Strong domestic demand led to a spike in imports, which was reflected in the widening trade gap.
Last month, household spending increased on both goods and services. The increase in goods outlays was 1.3%, driven by increases in food and drink, domestic equipment, recreational items and automobiles, petrol and other energy products.
Healthcare, housing, utilities, financial services, and insurance all contributed to a 0.6% increase in services spending.
After accounting for inflation, consumer expenditure increased by 0.5%. Additionally, February saw a 0.5% increase in so-called real consumer spending. With March's robust increase, consumer spending is expected to climb at a faster rate in the upcoming quarter.
JPMorgan analyst Daniel Silver stated, "Looking at the first quarter, consumers seem to have solid momentum." "While we don't have much hard data for the second quarter at this point, the end-point for the first quarter suggests that second-quarter spending growth could be strong."
A 0.7% increase in earnings in the midst of a tight labour market saw personal income climb by 0.5% following a 0.3% gain in February. Higher inflation, however, somewhat offset the gain.
After excluding taxes and inflation, disposable household income increased by 0.2% in March after declining by 0.1% in February. Both less and more savings were taken out by consumers. From 3.6% in February, the saving rate dropped to a 16-month low of 3.2%.
"The low saving rate is not a huge concern because we think it mostly reflects the strong state of household balance sheets, with debt-to-income ratios low, the cost of servicing debt still extremely low, and household net worth rising rapidly amid elevated house and equity prices," said Michael Pearce, deputy chief U.S. economist at Oxford Economics.