Core PCE up 0.3%, lower than anticipated

An inflation indicator closely followed by the US Federal Reserve rose slightly less than expected in February, raising some hopes that rate hikes will help moderate inflation.

The price index of personal consumption expenditure excluding food and energy rose 0.3% for the month, the Commerce Department reported on Friday. That was below the Dow Jones estimate of 0.4% and below January’s 0.5% gain.

On a 12-month basis, core PCE rose 4.6%, a slight slowdown from January levels.

Including food and energy, total PCE rose 0.3% monthly and 5% annually, compared to 0.6% and 5.3% in January.

The weaker-than-expected data showed monthly energy prices slipped 0.4% while food prices rose 0.2%. Goods prices increased by 0.2%, while services rose by 0.3%.

In other data from the report, personal income rose 0.3%, slightly above the 0.2% estimate. Consumer spending rose 0.2% compared to the 0.3% estimate.

Equities opened higher after the report, while longer-duration government bond yields fell.

“The inflation trend looks promising for investors. Inflation is likely to be below 4% by the end of the year, giving the Federal Reserve some leeway to cut rates by the end of the year if the economy slips into recession,” said Jeffrey Roach, chief economist at LPL Financial.

Market prices on Friday morning after the inflation report suggested an even split whether the Fed hikes interest rates another quarter of a point or holds steady in May.

The Fed’s own unofficial forecasts, released last week, pointed to perhaps another hike this year, not cuts. However, traders are expecting cuts this year, with the Federal Funds Rate ending the year at 4.25% to 4.5%, half a point below the current target range.

While inflation has subsided in some areas, it has remained damaging in others. Above all, the cost of accommodation has risen sharply. However, Fed officials are looking through this increase and expect rents to slow as the year progresses.

Still, inflation is likely to remain well above the Fed’s 2% target into 2024, and officials have said their focus remains on cutting prices despite the current banking turmoil.

Data released on Thursday suggested problems in the banking sector may also be at least under control. Borrowing from two Fed emergency lending programs eased slightly last week, suggesting there has not been a frantic surge in liquidity for banks that may be undercapitalized.

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