Analyzing Persistent Core Inflation Report | Episode 127 | 04-26-2024

Discover the economic ripples that follow when core inflation metrics stubbornly defy expectations. Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, critically analyzes the latest persistently high core PCE inflation reading, revealing a challenging landscape for the Federal Reserve and the broader economy. With a 2.8% increase clashing with anticipated figures and personal spending outstripping income growth, Megan dissects the precarious balance between consumer behavior and the potential for future interest rate hikes.

With the savings rate slipping to a disquieting 3.2%, Megan discusses the impact of elevated energy prices on inflation and market volatility. As spending trends towards non-durable goods, we consider the implications for fiscal policy and the stock market's tepid response. Join us as we unpack the complexities of economic indicators with Megan's guidance and prepare for our next episode, where we discuss the effects of the upcoming quarterly treasury refunding announcement.

Well, it's been another disappointing day from an inflation perspective. This is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors. It's Friday, April 26th, and this morning we received the monthly PCE core reading. This is a reading on inflation that it's the Fed's preferred inflation indicator. It has less noise in it than the headline CPI data that is also we referenced. But let's talk about what we received this morning. The numbers came in basically as expected, except on the year over year level. So this is the core PCE rose 2.8%. The expectation was for 2.7. It matched last month's reading at 2.8 as well. The problem is it's just kind of stuck and this is something the Fed's going to look at. This is followed by the disappointing report we got on the GDP price reading as well. So again, not good news from an inflation standpoint.

What also comes along with this report is personal income and spending, and what we saw was personal income rose about 0.5%. Spending outpaced that by a significant amount. That was a 0.8%. So when you take those two into account, we can calculate the personal savings rate and unfortunately that dropped again 3.2%. For the personal savings rate, this is historically low, well below the historical average, and this is troublesome when we look at this, especially from the spending levels, because we dug a little deeper and looked where this spending is coming from and if you look, it's a big jump in non-durable goods. That's what really led this spending level higher, and non-durable goods are things like energy, gas, food, eating out at restaurants. These are some of the things that are in this reading, and we know that we've had high energy prices now for some time. So this is filtering into the inflation data and this is not what the Fed wants to see.

The market has really not done much today. It's up slightly from the equity perspective, but the expectation for Fed rate cuts are now being priced out with the potential of one rate cut and not coming until the fourth quarter. So expectations are following in line with our view. We will continue to follow this inflation data. It is a troublesome data that we've gotten the past couple of weeks. We will make adjustments to our forecast for the Fed funds rate.

We're still looking that there may be flexibility in the fourth quarter to cut one time for the Fed, but we will and we're not ready to say that their rate hikes yet on the table. But again, if this continues this way and trends higher. That's where you're going to see rate hikes come back on the table and that's going to create a lot of volatility in the equity market. That's all we have today. We'll be back next week with a lot of information from the economic side of things, as well as the quarterly treasury refunding announcement. That has been something that's created a lot of volatility in both bonds and stocks over the past few refunding announcements that we've gotten. If you have any questions or comments, please feel free to reach out to podcast at verdence dot com. Thank you.