The Fed’s favorite rate of inflation, the core PCE price index, eased to 3.85% annualized in the fourth quarter, new data released alongside GDP figures on Thursday showed. His monthly PCE inflation data, due out Friday at 8:30 a.m. ET, will come under scrutiny, but the quarterly core price easing is not a big, unwelcome surprise. suggests. That lifted the S&P 500 to its highest level since his last Fed meeting on Thursday. stock market behavior.
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Wall Street expects Friday’s data to show the PCE price index was flat in December as annual inflation eased to 5% from 5.5%. His PCE price in Core is seen to have risen his 0.3% as inflation in Core dropped from 4.7% to 4.4%.
This rise in the S&P 500 is based on the belief that even if the US economy avoids a hard landing, inflation will continue to steadily recede. This could allow the Fed to pause rate hikes after his quarter-point move next Wednesday and March 22nd. The market expects the Fed rate hikes to turn into rate cuts later this year.
Fed Chairman Powell’s new inflation rate
This bullish scenario seems to gain support from Q4 PCE inflation data. However, it may be too early to celebrate. This is because Fed Chairman Jerome Powell has attempted to shift the focus of policymakers and investors to a new key inflation rate: PCE services excluding energy and housing.
This category, which includes healthcare, education, haircuts, hospitality, etc., accounts for about 50% of consumption. Powell called this “the most important category for understanding the future evolution of core inflation.” Changes in the price of such services are closely tied to wage growth. If the labor market remains very tight, the high level of service he inflation is likely to continue.
So what did the fourth quarter PCE data tell us? It wasn’t good news. The core PCE services minus housing price index rose at an annualized rate of 4.7% in the fourth quarter. Core PCE services minus housing inflation rose from 4.2% to 4.4% over the last 12 months.
This data may come as a bit of a surprise. When his CPI data was released on Jan. 12, many analysts pointed to the good news about Powell’s focus on inflation in services excluding shelter. His CPI readings show that prices in this category plunged slightly in the fourth quarter to an annual rate of 1.2% he.
Still, it highlights a significant difference in how governments measure PCE and CPI inflation.
PCE vs.consumer price increase rate
PCE covers a much wider range of spending than CPI, which reflects only out-of-pocket costs. This distinction is especially important when it comes to healthcare. Employers and governments pay a large portion of healthcare costs that the CPI ignores. Health services make up only 7% of his CPI household purchase basket, but they make up almost 16% of his PCE.
Not only that, the CPI health services inflation indicator began to fall sharply in October. This drop should continue, but it doesn’t really show the current price. This reflects the insurers’ profits reported last fall.
Among many other differences, Powell’s new PCE service inflation indicator also includes eating out. However, the Consumer Price Index data classifies groceries as goods, not as services.
What does this mean for the S&P 500?
If Fed Chair Powell’s “most important” inflation rate continues to rise in Q4, why is the S&P 500 rising?
It may be partly due to earnings, Tesla (TSLA) to get a notable pop. It’s also possible that investors aren’t paying as much attention to Powell’s new inflation category.
Focusing on core PCE services minus housing is so new that it’s not subject to Commerce Department reports or Wall Street estimates. Calculating IBD to derive the quarterly data in this article and the monthly data in the accompanying charts is a multi-step process.
Powell’s sustained inflation in the services sector could lead to more tightening of Fed policy, but it’s not clear. The real key to inflation and Fed policy is wage growth. The December jobs report showed wage growth slowing to an annualized 4% in the fourth quarter. That’s not much higher than his 3.5% wage growth, which Chairman Powell said could match his Fed’s 2% inflation target.
If wage growth continues to slow, the Fed can wait more patiently for inflation to subside. His two big reports on wage growth are looming next week. Here’s Tuesday’s fourth quarter employment cost index and his January jobs report on Friday.
Meanwhile, the S&P 500 remains in upward mode, gaining 0.6% in Thursday afternoon trading. After trading on both sides of the 200-day line over the past two weeks, the S&P 500 has pushed to its highest level since December 14th. This is an important juncture. The S&P 500’s past few attempts to leave his 200-day line have been quickly pulled back.
As of Wednesday’s close, the S&P 500 was 16.3% below its record close, but up 12.3% from the bear market close on Oct. 12.
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