The March PCE inflation stats were as expected and because they come a few weeks after the CPI is released, there is much less drama on this day, especially as it comes also after the PCE data seen for all of Q1 yesterday. The headline gain was one tenth m/o/m and 4.2% y/o/y. The core rate was higher by .3% m/o/m and 4.6% y/o/y. That core rate peaked at 5.4% in February 2022 and remember that healthcare is the biggest component where prices are set by Medicare and Medicaid. The housing component is about half the % seen in CPI in terms of contribution. With the Fed taking the fed funds rate to a 5-5.25% range next week, at least by the PCE measure, REAL rates will be further positive.
So when the time comes to cut rates, will the Fed maintain positive real rates as they follow inflation lower? Or will they just dust off the negative real rate playbook of shock, awe, zero rates and QE? Rinse and repeat? I hope not if any lessons are to be learned.
Anyway, the income and spending data were also as expected for March and thus should not lead to any revisions of note after yesterday’s Q1 GDP report. The savings rate rose for the 6th straight month to 5.1%. It was 9.3% though in February 2020.
The Employment Cost Index was the other stat of importance today and it rose 1.2% q/o/q, one tenth more than anticipated. Splitting apart the private sector from the headline figure saw wages and salaries rise by 5.1% y/o/y in Q1, the same pace seen in Q4 while benefits were up by 4.3% y/o/y vs 4.8% in Q4. For context, the 20 yr average pre Covid for private sector wages and salaries in this index was up 2.5%, so while wages have plateaued, they are running double the pace of what we’re used to. This ties into the profit margin story and they should continue to recede as much as companies are trying to regain them via price.
Core PCE
Savings Rate
Private Sector Wages & Salaries y/o/y
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