One month after increasing for the first time since September, the personal consumption expenditures price inflation index rose again from 2.5% to 2.8% in the month ending in March, its highest annual level since November of last year. Core PCE inflation, which strips away the volatile categories of food and energy prices, held constant at 2.8% on a year-over-year basis. Both headline and core PCE rose by 0.3% just in March, or nearly twice the Federal Reserve’s maximum target of a 2% annual inflation rate.
March marks the second straight month that headline PCE, headline consumer price index inflation, headline wholesale inflation, and core wholesale inflation all increased. Only core PCE and core CPI have stagnated, the latter at a troublingly high 3.8%. Of the six primary monthly inflation gauges used by the Fed, not one demonstrated an actual decrease in inflation, let alone a reversal in the worst price instability in 40 years.
The central bank’s war on inflation, which has mercifully fallen from its near-double-digit highs in 2022, is backsliding. On a three-month annualized basis, a more precise picture than the annual measure, the Fed’s preferred inflation measure of core PCE skyrocketed from 3.7% in February to 4.4% in March, more than twice the Fed’s 2% maximum inflation target. Friday’s PCE print comes just one day after Thursday’s abysmal announcement that PCE inflation in the first quarter of 2024 nearly doubled from the fourth quarter of 2023 to 3.4%, with core PCE clocking in 3.7%. The only good news about this double dose of disastrous inflation prints is that the bond markets had time to adjust their expectations again that the Fed will indeed fulfill its promise to keep the federal funds rate “higher for longer.”
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At the start of this year, the central bank projected it would cut interest rates just three times, but Treasury futures telegraphed at least twice as many rate cuts. Now, bond markets indicate a nearly two-fifths probability that the Fed does not deliver a single rate cut before Election Day and an almost 1-in-5 chance that it does not cut rates in 2024 at all.
If the Fed remains as data-dependent as Fed Chairman Jerome Powell promises, the real question remaining is not when it will cut rates or even if, but rather whether it is time to consider that the federal funds rate must be increased even further from its 23-year high.