The latest Personal Consumption Expenditures (PCE) data is “bad, but not terrible,” Bank of America believes.
While the data is concerning, it is not as dire as it could have been. The PCE index came in at 2.8% year-over-year for the month of March, indicating a relatively high level of inflation. However, analysts point out that revisions to previous months’ data helped mitigate the impact on the year-over-year rate.
Specifically, the core PCE for January was revised upward by five basis points, while February remained relatively unchanged. This adjustment in previous data lessened the overall impact on the year-over-year rate of inflation, analysts highlighted.
Personal spending spiked by 0.8% month-over-month, while real spending experienced its largest increase since last January, rising by 0.5%. Notably, goods spending led the way with a 1.1% increase in March, consistent with robust retail sales.
Addressing concerns about the narrative of “stagflation” or a negative supply shock, Bank of America emphasized that the recent GDP miss and beat on PCE inflation were not indicative of such a scenario. Instead, the analysis attributed the acceleration in demand to positive labor supply shocks, driven by strong immigration and labor force participation.
In terms of Federal Reserve implications, Bank of America suggested that while the inflation data were not as alarming as they could have been, there was no positive spin for the Fed.
“Inflation is too high for comfort. The fact that the data are consistent with strong demand rather than a supply shock makes the Fed’s decision easier: both of its mandates suggest that cuts remain firmly off the table for now,” they wrote.
Deutsche Bank anticipates that the forthcoming May FOMC meeting will likely adopt a more hawkish stance in response to another round of elevated inflation data, even though the Committee is expected to maintain an easing bias.
“While we expect the Committee will maintain an easing bias, we also anticipate the statement and press conference will echo Chair Powell’s view that firmer inflation prints suggest it will take longer to gain confidence about disinflation,” analysts wrote.
“Forward guidance may be limited as Powell emphasizes data dependence. Nonetheless, meeting signals should indicate that the likelihood of a rate cut over the coming meetings has diminished.”
Source: proactiveinvestors.com
