Surging Inflation Challenges Rate-Cut Hopes

Surging Inflation Challenges Rate-Cut Hopes 

Recent inflation data has surprised observers with an upward trend, putting pressure on doves hoping for earlier rate cuts. Today's release of the Core PCE Deflator, a key inflation indicator favored by the Fed, is crucial. Last month's increase in the headline deflator and yesterday's rise in core PCE for Q1 have heightened anticipation for the March data.

However, both headline and core PCE Deflator figures exceeded expectations, showing increases of +2.7% and +2.8% respectively, compared to forecasts of +2.6% and +2.7%. This unexpected uptick poses challenges for the doves.

Despite this, there is a silver lining as the hot PCE print is relatively 'dovish' compared to GDP-based data seen recently. However, concerns remain as the 3-month annualized core PCE surged to 4.4%.

The Service sector was the primary driver of both month-on-month and year-on-year accelerations in headline PCE and Core PCE. Within the SuperCore, which excludes Shelter, Services inflation continued to rise, led by Transportation Services and 'Other Services'.

Income and Spending both increased on a month-on-month basis, with spending surpassing income growth. Notably, spending growth has outpaced income growth on a year-on-year basis, albeit in nominal terms.

Wage growth, both in government and private sectors, accelerated, resulting in a decrease in the personal savings rate to its lowest level since November 2022. The increase in credit card balances reflects how individuals are coping with financial pressures, especially amidst ongoing government assistance programs.

While survey-based indicators suggest a decline in inflationary pressures, it's important to note that much of this reduction is 'cyclical', with acyclical Core PCE inflation remaining stubbornly high, albeit lower than its peak.

The question remains whether the apolitical Fed will be able to execute rate cuts this year, as anticipated by some, given the prevailing economic conditions.