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Inflation Progress Stalls, Putting Fed Cuts Further Out of Reach

The Federal Reserve’s preferred inflation measure remained stuck at elevated levels in March, but a feared overshoot was avoided, helping alleviate market tensions. Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.3 percent in March from the prior month, but January’s number was revised higher to 0.5 percent, bringing the three-month annualised pace up to 4.4 percent, well above the central bank’s target range. On a year over year basis, base effects saw core price growth stabilising at 2.8 percent, the same as in February, slightly higher than consensus estimates.

The overall personal consumption expenditures index was also up 0.3 percent from the prior month, 2.7 percent higher than a year ago. Personal income rose 0.5 percent month-over-month, accelerating from February’s 0.3-percent pace. Inflation-adjusted household spending rose 0.5 percent, accelerating from 0.4 percent in the prior month, and topping expectations for a 0.3-percent gain. The savings rate, which can offer a preview of future spending capacity, fell to 3.2 percent from 3.6 percent in the prior month, and is down from 5.2 percent a year ago as consumers at the bottom of the income distribution begin to dig into debt.

According to our calculations, Jerome Powell’s favoured “supercore” inflation measure – core services excluding housing rents – climbed 0.39 percent month-over-month, and 3.5 percent year-over-year in March, speeding up from February.

Treasury yields are pushing lower across the curve as markets engage in a sell-the-rumour / buy-the-news dynamics, but the greenback is pushing higher against its major rivals. With price growth running uncomfortably hot for five consecutive months, Fed officials are unlikely to provide much relief to fixed income markets at next week’s meeting – a “hawkish hold” has become overwhelmingly probable – suggesting that the dollar should remain aloft for now.

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