The Fed's preferred inflation measure nears its 2% target

01 May, 2018, 15:11 | Author: Corey Lynch
  • An Unexpected Journey       A BOE rate increase in May has gone from outside bet to sure thing and back again              Source Bloomberg

Consumer prices, as measured by the personal consumption expenditures price index, jumped 2.0 percent year-on-year last month.

Excluding the volatile food and energy components, the PCE price index soared 1.9 percent in the 12 months through March, the biggest increase since February 2017, after increasing 1.6 percent in February. That's why, along with expectations that underlying inflation may ease back a bit in coming months, the Fed is likely to react to Monday's news with restraint.

US consumer spending picked up in March while the Federal Reserve's preferred inflation gauge hit the central bank's 2% target for the first time in a year, reinforcing the outlook for further interest-rate hikes.

Fed officials are widely expecting the inflation will go up this year and stabilize around the central bank's 2-percent target over the medium term, based on optimistic economic outlook.

Investors should be prepared for a higher inflationary environment and can utilize targeted ETF strategies to hedge against the negative effects of inflation. Core inflation was up 1.9% in March from a year earlier. They won't provide a quarterly update of their projections for the rate path until they get together again in June.

Against the euro, which has been knocked by weaker-than-expected economic data and growing doubts about when the European Central Bank will normalize its monetary policy, the dollar gained 0.4 percent.

Decade-Long Gap       The BOE finally began increasing interest rates in late 2017
      
       Source Bank of England
Decade-Long Gap The BOE finally began increasing interest rates in late 2017 Source Bank of England

Other data last week showed that while US economic growth slowed to an annualized rate of 2.3 percent in the first quarter, wages and salaries shot up 0.9 percent during the same period. The dollar slipped against a basket of currencies after the data.

The Dow Jones Industrial Average and Standard & Poor's were set to open slightly higher in Monday trades.

At 8:56 a.m. (1256 GMT), the 10-year inflation breakeven rate, or the yield gap between 10-year Treasury Inflation Protected Securities and regular 10-year Treasury notes, was 2.17 percent, down 0.05 basis point from late on Friday, Tradeweb data showed. Based on that measure, the economy slowed in the first quarter.

Personal incomes rose 0.3 percent in March, while wages and salaries advanced 0.2 percent - the smallest gain since October. The data was included in last Friday┬┤s advance first-quarter gross domestic product report.

Consumer spending, meanwhile, rose for the first time in three months. The so-called real consumer spending fell 0.2 percent in February.

The two-month pullback came after strong holiday spending coupled with hurricane-induced purchases in the fourth quarter.




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