Latest U.S. Inflation Report Hints Fed’s Approach Approach Is Working – But Slowly

Key takeaways

• U.S. core personal consumption expenditure index rose slightly less than expected in February, hitting 4.6%
• Consumer spending was also weakened, with the stock market rising and Treasury yields falling
• The data doesn’t necessarily mean the Fed will pause rate rises as effect of Silicon Valley Bank collapse on the economy is still unknown

The Fed’s preferred measure of inflation has eased slightly, which is a small glimmer of hope amid the economic doom and gloom we’ve been hearing for close to a year.

It’s promising results for the Fed, who need to make some tough decisions on interest rates while avoiding raising them too high for fear of triggering a recession. But the jobs market is still strong and Silicon Valley Bank’s bank run hasn’t affected the data – yet.

But is inflation easing thanks to tightening monetary policy, or is this a calm before the storm thanks to SVB’s collapse? Let’s look at the latest data and see how the land lies.

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The latest on U.S. inflation

Core PCE excluding food and energy increased by 0.3% for the month of February, beating analyst estimates. Including food and energy, PCE rose by 0.3% and 5% annually – an improvement on the January figures, which were 0.6% monthly and 5.3% annually. February’s data marks an 18-month low in price increases.

Interestingly, personal income slowed by 0.3%, slightly above the predicted 0.2%, while consumer spending only rose by 0.2% after January’s surge. Consumer spending is weakening as interest rate hikes hit everyone’s pockets.

It’s important to note this data doesn’t reflect the fallout from Silicon Valley Bank’s collapse in March. If there’s been any impact from that on credit conditions, we’ll see it in the March data which will come out at the end of April.

How did the markets react?

The Fed likes to look at the core PCE index because it has a broader remit and is less volatile than core CPI. If it’s starting to cool off, that’s a good sign.

The S&P 500 opened 0.4% higher while the S&P 500 futures were up 0.2%. Crucially, long-term Treasury yields declined at the news, with the ten-year yield climbing down 2.3 basis points to 3.528%.

This is all promising news for the long-term economy and for the Fed. But there are a few other factors going on that could influence any decisions on interest rates.

What does the data mean for interest rates?

The Fed has been very busy over the last year dramatically raising interest rates in a bid to fight rampant inflation – the highest levels in decades – caused by the pandemic and the war in Ukraine. After a quarter-point increase as the outcome from the last Fed meeting, interest rates are now sitting at a target of 4.75-5.00%.

But the rate raising has had consequences, too. It was one of the key reasons why Silicon Valley Bank suffered a bank run and collapsed. The next interest rates decision is due at the start of May, after the impact of SVB is realized – which may well affect the key metrics further.

Another key factor is how the job market is performing, and the data there hasn’t been so straightforward. The latest number of Americans who applied for unemployment benefits is 198,000, up three weeks in a row. However, unemployment is still at record low levels while hiring remains strong.

Any sign of inflation pressures easing is a welcome one, but let’s not overlook the fact the PCE index’s 4.6% level is still over double the 2% target the Fed set. Plus, one good data set is only the potential start of a downwards trend, not a definitive sign that the U.S’ inflation worries are over.

What does the global picture look like?

Is the U.S. out of step with the rest of the world? The truth is that it’s right in line with other major economies, who are also feeling the inflationary pinch.

The latest from the European Central Bank was a 50 basis points increase to interest rates, stating it would help bail out any struggling banks. The move came around the same time Swiss-based bank Credit Suisse, which had been teetering on the edge for months, wobbled in the wake of the SVB crisis and was offloaded in a shotgun sale to competitor UBS. The EU’s March inflation data is expected to hit 6.9%.

In the UK, the Bank of England has raised interest rates 11 times in a row to hit 4.25%. The latest inflation data shows CPI was up from 10.1% in January to 10.4% in February, caused by food shortages pushing the price of some items to a 45-year high.

In China, annual consumer inflation slowed to the lowest rate in 12 months, only 1% higher than the year before. China’s economy is expected to bounce back thanks to easing pandemic controls which throttled industry.

It’s worth looking at the wider picture to see how other countries are doing because banking has become increasingly international – just
just
as we saw with SVB and Credit Suisse. Each market has its own macroeconomic factors to contend with, but inflation is slowly coming down for the majority of them.

The bottom line

Both Wall Street and the Fed are also both watching closely for any signs of a recession. Raising interest rates makes borrowing more expensive, which in turn slows spending and growth – but it’s a delicate balance, as we’ve seen with the SVB saga.

The market is volatile, banks are nervous and investors are hoping each rate hike is the last so the markets can grow again. That’s why many experts are still predicting the Fed will introduce another quarter-point interest hike to further tame the inflation beast, but we’ll have to wait until the end of the month for a more definitive picture.

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