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The latest look at inflation is the same as last week’s CPI and PPI reports – higher than the previous reading, but lower than the peak levels reached last year. This raises the question: Is inflation moving back up or is the road down just getting a little bumpy? The monthly PCE indices, both headline and core, rose 0.6%, the largest monthly gains since June 2022. Year-over-year (Y/Y) numbers were the highest in two months. Headline Y/Y PCE was up 5.4% and core Y/Y PCE was up 4.7%. The Federal Reserve considers PCE to be a more comprehensive and accurate measure of inflation, so you can bet its antennas just went up.
Included in the PCE inflation report were measures of January spending and income. Spending rose 1.8%, more than expected, which is a substantial reversal from December’s drop of 0.1%. Income was up 0.6%, almost half of expectations. The savings rate rose to 4.7% even with the increased level of spending. While demand remains strong, consumers seem to be restoring their nest eggs.
Key Indicators this Week
Housing – January home sales were a mixed bag. Sales of existing homes fell 0.7%, the 12th month of falling sales. Homes are staying on the market longer, prompting some sellers to accept as much as 10% off the asking price. New home sales, on the other hand, increased 7.2%, due to a 17% surge in the South, amidst falling sales in other regions. Average new home prices fell for the first time in more than two years, while existing home prices continue to increase. Despite the spike in new home sales, overall home sales are slowing. Home purchase applications fell to the lowest level since 1995, according to the Mortgage Bankers Association. Mortgage rates turned around and began moving higher this month after a brief respite.
FOMC Minutes – A week doesn’t go by without a Federal Open Market Committee (FOMC) meeting, comments from Federal Reserve officials or minutes from an FOMC meeting. This week gave us the minutes from the early February FOMC meeting. The message was the same we have been hearing for months, only stronger: interest rates need to go higher and stay there longer to ensure inflation continues to move lower. Even though inflation has come down dramatically, committee members remain concerned about the tight labor market, which they see as putting continued upward pressure on wages and prices. The 25-basis-point rate hike in February was unanimous, although a few members were in favor of a 50-basis-point increase to show the group’s resolve to bring inflation down. Several FOMC members have since expressed interest in going back to a 50-basis-point move at the March meeting. The market is currently pricing in a 25-basis-point move with a peak rate of 5.40 by July 2023.
GDP – The economy grew 2.7% in the fourth quarter, slower than the 2.9% pace originally estimated. Personal consumption was revised down from 2.1% to 1.4%. On the other hand, business investment increased 3.3% versus the original estimate of 0.7%. The inflation component of GDP, the price index, came in higher at 3.9% from 3.5% – the wrong direction, but well below the 9% peak rate reached last year. The report confirms to the Fed its job is not done. Atlanta Fed GDPNow has revised its estimate for first quarter from below 1% just a month ago to 2.5%.
Sarina Freedland – Senior Investment Officer
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