Data from the Consumer Price Index (CPI) and Producer Price Index (PPI) indicates that the core Personal Consumption Expenditures (PCE) may exceed February’s figures. Pantheon Macroeconomics projects a rise to 0.36% and a year-on-year increase to 2.8%, up from 2.6%.
Despite a decline in the overall CPI, the CPI components have not led to a decrease in core PCE, according to recent comments made on social media. The initial post suggesting these trends appears to have been deleted.
Core Pce And Inflationary Pressures
That potential increase in core PCE would indicate stronger underlying price pressures than previously expected. While overall CPI declined, the elements used to calculate core PCE suggest inflationary forces remain persistent. This discrepancy between headline CPI and core inflation measures has generated debate among analysts, with some expressing concerns that markets may have been too quick to assume disinflation is well underway.
Market expectations for interest rates rely heavily on inflation readings. If core PCE does come in higher than February’s numbers, that could complicate forecasts for rate cuts later in the year. Powell and his colleagues have consistently pointed to core PCE as their preferred gauge for underlying inflation trends. A month-on-month reading of 0.36% would annualise to levels above central bank targets if sustained. That would leave policy decisions more dependent on future inflation data, rather than any assumption that disinflation will continue at the current pace.
Although some analysts initially suggested that recent CPI figures would translate to lower core PCE, the composition of inflation data suggested otherwise. Some of those interpretations appear to have been walked back, with earlier forecasts now adjusted to reflect stronger inflation pressures. Where inflation holds steady, or even ticks up slightly, traders will need to reassess assumptions about when policy changes might come.
Bond markets have taken notice, with yields moving accordingly as expectations shift. That re-pricing has been particularly notable at the front end of the curve, reflecting the market’s sensitivity to even small changes in inflation projections. Any deviation in core PCE from prior estimates could prompt further adjustments along the curve, particularly if it shifts expectations around future decisions from policymakers.
Market Reactions And Policy Implications
While higher inflation readings do not guarantee a response, officials have made it clear that they are unwilling to ease policy too soon. The latest statements from policymakers reaffirm that sustained evidence of progress is required before any adjustments will be considered. If price pressures prove to be more persistent, that could present a dilemma. Markets anticipating a smooth transition towards lower rates may find themselves navigating more uncertainty than anticipated.
