The Fed’s key inflation rate is heating up again, raising the odds of a rate hike; The S&P 500 shakes it up

The Federal Reserve’s primary inflation rate showed that core price pressures were stronger than expected in April. Supercore inflation, or basic services excluding housing, also rose. The S&P 500 initially lost ground, then regained momentum after the report, although the data bolsters the position of Fed hawks eyeing another rate hike. Progress on the debt ceiling talks took center stage.


Core inflation rate

The personal consumption expenditures price index, or PCE, rose 0.4% in April. This brought the annual inflation rate to 4.4%, against expectations of 4.2%.

Typically, Federal Reserve decision-making places more weight on underlying inflation, which eliminates volatility in food and energy prices. Core prices also rose 0.4% in April, while the 12-month core inflation rate came in at 4.7% vs. 4.6% expected.

Wall Street economists had expected a monthly increase of 0.3% for the overall PCE price index and core prices.

Focus on the Fed: Supercore Services Inflation

Beginning late last year, Federal Reserve Chairman Powell shifted the inflation focus to core PCE services excluding housing or supercore services. This aligns with the Fed’s view that the tight labor market and high wage growth are causing stubbornly high inflation. Salaries represent a high percentage of costs for service companies. As a result, superservice inflation should subside as wage pressures moderate.

April PCE data for such services, such as healthcare, haircuts and hospitality, showed prices rose 0.4% on the month. The increase for March was revised slightly up to 0.29% from 0.24%. The 12-month inflation rate for basic services excluding housing decreased from 4.5% to 4.6%. Still, the trend over the past three months has been better, with supercore prices up 4.35% year-on-year. This is the lowest since last September.

Personal income and expenses

Personal income rose 0.4% on the month, matching expectations of a 0.4% rise. Personal consumption expenditure rose 0.8%, double the expected gain, after two months of sluggish spending.

Federal Reserve Rate Hike Odds

Prior to the PCE inflation report, markets were pricing in a 41% chance of a quarter-point rate hike at the June 13-14 Federal Reserve meeting. That jumped to 58.5% after the PCE data. Markets now see a 77% chance of a rally by the July 25-26 Fed meeting.


The S&P 500 rose 0.6% in Friday morning stock action after futures briefly turned negative on inflation data. Futures had risen amid apparent progress towards a debt ceiling agreement.

A debt ceiling deal won’t necessarily pave the way for a prolonged rally in the S&P 500. The disappearance of fiscal support and further tightening by the Fed, unloading the assets it bought during the pandemic, could turn out to be a slowing factor.

Be sure to read IBD’s daily afternoon The Big Picture column to stay in tune with the underlying market trend and what it means for your trading decisions.


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