The Federal Reserve's key inflation rate showed core price pressures were tamer than feared in March as the U.S. economy slowed. Yet as the Fed gets set to decide whether to raise interest rates next Wednesday, the Labor Department reported that worker pay showed surprising strength in the first quarter. After the data, the S&P 500 turned positive, building on Thursday's strong rally.
Core Inflation Rate Rises
The personal consumption expenditures, or PCE, price index rose a tame 0.1% in March, lowering the annual inflation rate to 4.2%, matching expectations.
However, the core PCE inflation rate, which strips out food and energy, rose 0.3% last month. The core inflation rate came in at 4.6%, above the 4.5% expected. The higher-than-expected core annual inflation rate reflected upward revisions to January data, which saw core PCE prices rise a revised 0.6% on the month.
On Thursday, the Commerce Department reported that the PCE price index rose at a 4.2% annual rate in the first quarter as inflation firmed from Q4's 3.7% rate. The Fed pays closer attention to the core PCE inflation rate, which hit 4.9% in Q1, up from 4.4% in Q4 and 4.7% the prior two quarters. But we now know that the heating up of inflation happened in January and hasn't seemed to last.
In fact, there was some good news regarding services inflation, excluding housing and energy services, which Fed chair Jerome Powell has highlighted as key to the broad inflation outlook. Prices for these services, such as health care, haircuts and hospitality, rose just 0.24% in March, down from 0.36% in February and 0.55% in January. The annual inflation rate for core nonhousing services eased to 4.5% from 4.8%.
Since wage growth makes up a high percentage of costs for service businesses, core nonhousing services inflation is expected to move pretty much in tandem with wages.
Employment Cost Index
The Employment Cost Index, the Fed's favorite read on wage trends, showed that compensation rose 1.2% in Q1, vs. an upwardly revised 1.1% in December and exceeding 1% expectations. Compensation grew 4.8% from a year ago, but wages and salaries rose 5.1% as benefits increased 4.3%.
Federal Reserve chair Powell has said that wage growth of 3.5% is consistent with the 2% inflation target.
Economists pay close attention to wages and salaries for workers in occupations that aren't highly geared to volatile incentive pay, such as commissions. Excluding incentive-paid occupations, wages and salaries rose 5% from a year ago, unchanged from Q4.
Jobless Claims
On Thursday, the Labor Department reported that new claims for jobless benefits fell 16,000 to 230,000 in the week through April 22. That lowered the four-week average of claims to 236,000 from 240,000. But that's still up 24% from late September.
The data also show the unemployed are having a harder time finding jobs. The number of people continuing to receive benefits in the week of April 15 dipped 3,000 to 1.858 million. But that's climbed steadily from a low of 1.29 million in September.
GDP Slows
Real gross domestic product rose at an 1.1% annual rate in the first quarter, a sharp fall from 2.6% in Q4 and well below estimates of 2%.
The slowdown came as business equipment investment fell at a 7.3% annual rate, even worse than the prior quarter's 3.5% decline. Private inventories fell by $138 billion after a $98 billion increase in Q4. That reversal subtracted 2.3 percentage points from GDP growth, almost fully offsetting a 2.5-percentage-point lift from stronger personal consumption expenditures.
Fed Rate Hike Odds
Although jobless claims show the strong labor market has taken a clear turn for the worse, the Fed still might hike its key rate on May 3.
After Friday's PCE inflation and ECI data, markets were pricing in 83% odds of a quarter-point hike, down from 84% on Thursday.
Short of another bank-crisis eruption, a rate hike looks like a done deal. However, shares of First Republic Bank continued to collapse on Friday as the FDIC was reportedly in discussions about the bank's fate.
S&P 500 Tries To Rally
The S&P 500 rose 0.3% to 4146 on Friday morning. But That followed a Thursday session in which the S&P 500 rallied just under 2%, helped by strong earnings from Meta Platforms.
The S&P 500 has been locked in a tight trading range between 4050 and 4170 over the past month, holding above its 50-day moving average. A break higher or lower is bound to happen.
Be sure to read IBD's The Big Picture each day to stay in sync with the market's underlying trend and what it means for your trading decisions.
