Don’t expect the inflation picture to get much, if any, better when the U.S. Commerce Department releases its March data for personal income and outlays on Friday.
Along with a view into consumers’ spending and income, economists and investors will be focused on two key inflation indicators, PCE Price Index and Core PCE Price Index, which the Federal Reserve uses to gauge underlying inflation trends.
On average, economists expect the PCE price index to rise 0.3% M/M in March, unchanged from the February pace. That’s expected to bring the Y/Y increase to 2.6% from 2.5% in the prior month.
Core PCE, which excludes volatile food and energy prices, is expected to rise 0.3% M/M, also the same increase as in February. The Y/Y increase is anticipated to be 2.7%, a tick down from the 2.8% rise in the previous month.
Some see upside risks for the inflation data.
“The PCE deflator and core deflator over the past three months, month-to-month… have gone the wrong way,” said Dan North, an economist at Allianz Trade, the world’s largest insurer for credit finance, part of German insurer Allianz SE.
“They’re actually going up,” he said. “So this is why I think the Fed is very adamantly saying, ‘Hey, we’re nowhere near where we want to be.'”
He expects both the PCE Index and Core PCE Index to rise a tenth of a percent from February.
Gasoline prices are expected to rise on the headline PCE side. Transportation services and financial services are anticipated to push up the headline inflation number as well as the core figure.
In addition, housing costs remain stubborn. While some market conditions have softened, especially in rent in some parts of the U.S., they have not yet shown up in PCE and consumer price index calculations, North said. While the Fed has been expecting those conditions to eventually filter through to the official inflation data, North said, “I’m not holding my breath.”
Michael Kramer, Investing Group Leader at Mott Capital Management, agrees that there’s upside risk to the inflation data coming out on Friday. “While [the PCE] estimates don’t suggest anything alarming, anecdotal evidence supports that they may be too low, that growth in the first quarter was stronger, and that prices rose faster in March,” he wrote recently.
If both the PCE report and the first Q1 GDP estimate come in hotter than expected, that can push two-year Treasury rates back to 5.25%, “potentially wiping out any hopes of rate cuts in 2024,” Kramer said. “They could also have put murmurs of rate hikes back into the conversation.” However, Q1 GDP didn’t rise as much as expected, but Q1 PCE inflation came in hotter than consensus.
Allianz Trade’s North isn’t as concerned about the Q1 GDP report. “We already know what happened in January and February,” he said. “So that’s when the Friday report becomes so much more important.” He considers the personal income and outlays report to be just as important as the monthly employment report, “because it shows what the consumer is doing, and that’s 70% of the economy.”
The advance Q1 GDP report on Thursday, though, sounded alarm bells for some. “This report was the worst of both worlds: economic growth is slowing, and inflationary pressures are persisting,” Chris Zaccarelli, chief investment officer at Independent Advisor Alliance, wrote in a note.
This article was originally published by a seekingalpha.com . Read the Original article here. .