U.S. inflation increased and consumer spending rose

The personal consumption expenditures (PCE) index, tracked by the U.S. Federal Reserve (Fed), rose 0.6% last month after rising 0.2% in December. The so-called core PCE price index (excluding volatile components) was up 4.7%.

“Frankly, I don’t understand why people are surprised by the PCE data,” commented Brian Jacobsen, senior investment strategist at All Spring Global Investments, Wisconsin, on the data. – We already knew that retail sales in January would be higher than expected. We also knew from the consumer price index data that inflation was higher than expected. There were a few other informative details as well: such as significant wage growth. We will probably see a pullback in the January numbers when the February data comes out. It looks more like a bounce than a trend change.”

Ken Mahoney, CEO, Mahoney Asset Management, emphasizes: “We’ve had six months of declines in the consumer price index, which has been positive.” At the same time, Mahoney agrees that “there’s been a surge in spending, and the Fed doesn’t like that. They’re trying to slow the economy down a little bit to lower inflation, and the market sees that as a sign that rates could potentially stay higher longer… The dollar is strong right now, but in terms of international earnings, many would rather have a weaker dollar… “The bears are probably cheering as this is starting to look less and less like a new bullish situation, and more like just another bounce in a bear market.” Thus, with humor, Ken Mahoney sums up the situation in traditional stock market jargon.

Gene Goldman, chief investment officer at Cetera Investment Management, California, notes that “PCE’s underlying performance was still well above expectations… The big surprise was that while personal spending was higher than expected, the savings rate increased. This continues to confirm the fact that the economy is strong.”

Bill Adams, chief economist at Comerica Bank, Texas, agrees: “The conclusion is that the economy is still growing strongly. Yes, overall inflation has risen more than expected, which is another sign that it will be volatile in early 2023, making it more likely that the Fed will hold interest rates higher for longer. The higher inflation at the beginning of the year, the more the Fed will put the brakes on this year…which is a headwind for risk assets.”

Priya Misra, head of global strategy at TD Securities, New York, adds: “Smoothing the yield curve makes sense… The Fed clearly has some work to do to return inflation to 2%. This is not good news for risk assets.”

Peter Cardillo, chief economist at Spartan Capital Securities, New York, concludes, “The numbers were hotter than expected. And we’re going to see pressure on yields… we are likely to see three more rate hikes, and the tightening cycle likely won’t end until the second half of the year. The economy remains strong. The surprising factor is the consumer: he’s a spender.”

Federal Reserve Bank of Cleveland Governor Loretta Mester said Feb. 24 that she was not surprised by the latest U.S. inflation data, which she sees as another reminder that rates still need to be raised. “It will take more effort from the Fed to get inflation on a steady path to 2%,” Mester told Reuters on the sidelines of a conference in New York held by the University of Chicago Business School.

“We just need to see all these prices come back down, and we haven’t seen that sustainably yet,” Mester said. The Fed veteran noted that she advocated a 50 basis point rate hike at the last Fed meeting, as opposed to the 25 basis points her colleagues supported: “There are inflationary pressures in the economy, the inflation rate is still too high, and that requires more attention to monetary policy.”

Mester reiterated that she still believes that the federal discount rate, which is now 4.5% to 4.75%, needs to rise above 5% and stay at that level in order to bring inflation down.

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