October 4, 2023

The Federal Reserve’s primary inflation rate showed that core price pressures cooled further in June, supporting Wall Street’s view that this week’s rate hike was the last of the cycle. Supercore inflation, which measures prices changes for services excluding housing and energy, came in tame for a second straight month. Employee compensation costs came in below expectations in Q2, moving closer to the Fed’s comfort zone. S&P 500 futures extended solid gains in early Friday stock market action after the reports.


Core Inflation Rate

The personal consumption expenditures, or PCE, price index rose 0.2% in June. That dropped the annual inflation rate to 3%, matching expectations and down from 3.8% in May. That’s the lowest since March 2021.

Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. Core prices rose 0.2% in June, while the core 12-month inflation rate came in at 4.1% vs. the 4.2% expected. Core inflation is lower than it’s been since September 2021.

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Wall Street economists expected a 0.2% monthly increase for both the overall PCE price index and core prices.

Fed Focus: Supercore Services Inflation

Starting late last year, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That’s in keeping with the Fed’s view that the tight labor market and elevated wage growth are at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.

June PCE data for for these services, such as health care, haircuts and hospitality, showed prices rising just 0.2% for a second straight month. The 12-month inflation rate eased to 4.1% from 4.5%. The recent trend is even better. Over the past three months, supercore services inflation has run at a 3.3% annualized pace.

Employment Cost Index

The Employment Cost Index showed overall compensation moderated to 1% growth in Q2, rising 4.5% from a year ago. Wall Street expected a 1.1% quarterly rise. Wages grew 1% and benefits 0.9%.

The Fed pays close attention to pay for private-sector workers excluding those in incentive-paid occupations that can see more volatility from commissions. In this segment, wages rose 1.1% in Q2 and 4.5% from a year ago. The annual gain fell vs. 4.8% in Q1.

Personal Income And Spending

Personal income rose 0.3% on the month vs. forecasts of 0.4%. Personal consumption expenditures rose 0.5%, above 0.4% expectations. Adjusted for inflation, consumer spending rose 0.4%.

Federal Reserve Rate Hike Odds

Ahead of the PCE inflation report, markets were pricing in 20% odds of a quarter-point rate hike at the Sept. 19-20 Federal Reserve meeting and 31% odds of a hike the following meeting on Nov. 1. Those odds barely budged after the PCE and ECI data.

S&P 500

The S&P 500 rose 0.9% in early Friday stock market action. The S&P 500 slipped 0.6% on Thursday after ending basically flat on Wednesday following the rate hike. On Tuesday, the S&P 500 closed at a 15-month high, within 5% of the market’s all-time closing high hit in January 2022.

Economic data could determine where the rally — and Fed policy — go next, and today’s data is encouraging.

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


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