‘Burden of proof’ is on inflation optimists after Fed’s preferred inflation gauge fails to calm markets

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The latest reading of the Federal Reserve’s favorite price indicator, which contains some signs of cooling, fails to calm the nerves of traders and investors who are worried about a possible recession, higher interest rates and inflation than simply not going down fast enough.

US stocks fell sharply on Thursday after the May inflation data was released, while investors gathered on Treasurys security in a classic risk-abandonment response to fears of slowing growth . But economists say worries aren’t just weighing on an economic contraction weighing on markets, as they point to signs still worrying in Thursday’s inflation report.

While the initial take on the publication of the so-called personal consumer price index in May focused on signs of easing price pressures on the narrowest basic measure, which excludes food and energy, the overall monthly reading of the PCE still rose 0.6% last month and was three times the gain of 0.2% in April. In addition, the overall inflation rate over the past year remained unchanged at 6.3%.

“There may be a sense of victory for some that things are getting better, but they need to get better faster,” said Will Compernolle, a senior economist at FHN Financial in New York. “While the core PCE came in less than expected, which is certainly unusual because there have been mostly surprises on the rise for inflation, the Fed will choose to ignore the core PCE if people are still is scaring of the CPI “.

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The separate report on the consumer price index, released on June 10, included an annual rate that rose to 8.6% in May, a high of nearly 41 years, and was the third consecutive reading above. of 8%. The next CPI report will not be presented for another two weeks and until then “the burden of proof falls on inflation optimists that things are going in the right direction,” Compernolle said by telephone on Thursday.

“Here we are at the end of June and these are the May data,” the economist said. While the PCE’s monthly basic reading rose 0.3% for the fourth straight month, less than Wall Street’s 0.4% forecast, the momentum for those figures increased, he said. If extended to three digits, the increase in the basic PCE was 0.303% in February, 0.366% in March, 0.334% in April and 0.338% in May, according to the calculations of the gross PCE data. the U.S. Bureau of Economic Analysis, “not far away.” the monthly boost needed to bring prices closer to the Fed’s 2% target ”on an annualized basis.

“For much of last year, there was a feeling that if you exclude one thing or that, inflation is actually totally fine,” Compernolle said. “But in order to control the Fed’s credibility, policymakers cannot show any sign of hesitation in their willpower to fight inflation.”

As of Thursday afternoon, the top three U.S. stock indices remained bearish, with Dow Industrial DJIA,
more than 200 points. The S&P 500 SPX,
and Nasdaq Composite COMP,
they were down 0.6% and 0.9%, respectively. Treasury yields were lower overall, with the 10-year rate falling below 3% as public debt buyers entered.

Fed fund futures traders continued to trade with some possibility of a rate hike next year in the view that policymakers will have to reverse their rate hike campaign in an economic slowdown and / or, finally, they will control inflation.

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