The primary Federal Reserve inflation rate may not deal a potential death blow to the rate-cut outlook after all. Health care services prices, the biggest component of the core PCE price index, were very tame in March, according to producer price index data. The S&P 500 appeared to regain its footing in early Thursday stock market action, a day after a after hot CPI inflation data sparked a selloff.
Primary Fed Inflation Rate
The Fed's key inflation rate, the core PCE price index, will get its March update on April 26. A day earlier, the Bureau of Economic Analysis will release PCE inflation data for Q1 with its GDP report.
Keep in mind that the core PCE price index has recently shown a tamer inflation trend than the core CPI — though not in January. Still, the current rule of thumb for looking at CPI data is that monthly increases in core prices of around 0.2% are good news and 0.3% increases may still be fine, depending on how things look below the surface. A 0.4% rise —like we saw in March — might not be great, but may not be awful.
Thursday's PPI data included key price data that also feeds into the PCE price index. Health care services inflation is biggest, accounting for 19% of the weight of the core PCE price index, and there was good news on that front.
For perspective, ahead of the PPI data, Nomura economists figured that the core PCE price index would rise 0.35% in March. That factored in estimates of a 0.2% to 0.3% rise in health care services prices.
However, the PPI data showed that health care prices actually slipped very slightly, unadjusted for seasonal effects.
Lately, PPI health care inflation has run softer than CPI health care data. That partly reflects CPI data on health insurance, which is a poor real-time measure. Also, CPI data is based on out-of-pocket spending, while PPI data includes employer and government reimbursements to medical providers.
After the data, Capital Economics estimated that the core PCE price index will rise just 0.21% in March. However, Pantheon Macroeconomics estimated a 0.28% monthly rise for the core PCE.
CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.4% on the month amid higher gas prices, above 0.3% forecasts. The 12-month CPI inflation rate ticked up to 3.5% from 3.2% in February, matching predictions.
The core CPI, which strips out volatile food and energy prices, rose 0.4% vs. February levels, above 0.3% estimates. The annual core CPI inflation rate held at 3.8%. Wall Street's consensus forecast was 3.7%, according to Econoday. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Upon closer inspection, the core CPI wasn't quite as bad as the headline, rising 0.359% on an unrounded basis.
More CPI Details
So what accounted for the bigger-than-expected increase in core prices? Transportation services prices rose 1.5% on the month. That came as auto repair costs jumped 3.1% and auto insurance prices rose 2.6%.
Medical services prices increased 0.6% on the month, as health insurance prices rose 1.2%. Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted a 1.2% jump in hospital prices, lifting the 12-month inflation rate to 7.7%, the highest since April 2008.
"This likely is the lagged effect of surging wage growth in the sector" in 2022 and into 2023, even though wage growth is now slowing sharply.
Apparel prices rose 0.7%. Shelter costs rose 0.4%.
Meanwhile, energy prices rose 1.1%, with a 1.7% increase in gas prices.
Fed Rate-Cut Odds
After the PPI inflation data, markets were pricing in 49% odds of a Fed rate cut by July 31, up from 42% ahead of the report.
For all of 2024, markets see 58% odds of at least two quarter-point rate cuts from the current 5.25% to 5.5% range for the Fed's key rate. That's up from 53% ahead of the PPI data.
S&P 500
After the PPI data, the S&P 500 was near the flat line, a day after sliding 0.95% on CPI data. On Wednesday, the S&P 500 ended about 2% off its March 28 all-time closing high of 5254.35.
The 10-year Treasury yield eased to 4.54%, after surging 19 basis points to 4.56%, a fresh 2024 high, on Wednesday.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
