Here is the Commerce Department’s inflation report. The Federal Reserve puts more emphasis on the PCE inflation index than the CPI. (Treasury uses the CPI to adjust I-Bond and TIPS yields.)
Too Hot for the Fed to Stop
Employment costs and other inflation measures cement a Fed increase next week and possibly later too
By Justin Lahart, The Wall Street Journal, April 28, 2023
Investors have been hoping the Federal Reserve’s message following next week’s policy-setting meeting will be “hike in May and go away.” But recent economic data suggests the central bank won’t be able to do that.
The Labor Department on Friday reported that its employment cost index rose a seasonally adjusted 1.2% last quarter from the fourth quarter, stronger than the 1% economists polled by The Wall Street Journal expected. That put it 4.8% above its year-earlier level—not far below the 5.1% it clocked in the fourth quarter, and much higher than Fed policy makers think is consistent with their 2% inflation goal.
Also Friday, the Commerce Department, in its monthly report on personal income and spending, said that its measure of overall consumer prices was flat in March from February, but that its measure of core prices, which excludes food and energy items in an attempt to better reflect inflation’s underlying trend, rose a seasonally adjusted 0.3%. That put core prices 4.6% higher than year earlier…[end quote]
From the same month one year ago, the PCE price index for March increased 4.2 percent. Prices for goods increased 1.6 percent and prices for services increased 5.5 percent. Food prices increased 8.0 percent and energy prices decreased 9.8 percent. Excluding food and energy, the PCE price index increased 4.6 percent from one year ago. This is much higher than the Fed’s target of 2% and it isn’t declining fast.
The Fed isn’t going to be happy about the 5.5% increase in services. Some of this is rising rents, which may slow in the future. But a lot of it is rising incomes which tend to build on themselves. Wage-price spirals were a factor in the 1970s inflation.
The market has been over-optimistic about the course of inflation and the Fed’s path before. I think that the banking crisis is behind us. The Fed won’t be deterred as the market hopes. I also think that inflation will be stickier than the markets expect.
There’s no question that the Fed will raise the fed funds rate 0.25% on May 5. I think they will continue to tighten after that, disappointing the markets at the same time that Congress is fighting over raising the debt ceiling.
The stock market has done well up to now in 2023. It’s possible that “Sell in May and go away” will apply this year more than most.