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Fed’s Wait-and-See on Rate Cuts Further Supported by Extra-Hot “Core Services” PCE Inflation & Hot “Core” PCE Inflation

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Housing inflation refuses to cool for the eighth month, and five of the remaining seven core services accelerated further. This is not good.

The core PCE price index, which excludes the volatile components of food and energy and is the inflation index the Fed is focused on, jumped by 3.9% annualized in March from February, nearly double the Fed’s target of 2%, according to the Bureau of Economic Analysis today (blue in the chart).

The three-month annualized core PCE price index, which irons out some of the month-to-month volatility and which Powell cites all the time, accelerated to 2.9%, the highest since September (red), and moving decidedly away from the Fed’s 2% inflation target.This was driven by the usual suspect, a sharp acceleration in core services to 5.5% (three-month annualized) that we’ll get to in a moment:

Core Services PCE price index, which excludes energy services, has been hot and is getting hotter. This is where inflation is entrenched, and where the majority of consumer spending takes place. And Fed speakers from Powell on down have pointed at this issue endlessly.

Core services inflation had calmed down somewhat by mid-2023, but then refused to calm down further, getting stuck in the 3.5% range annualized for five months. And in January, it began spiking in a very disconcerting manner.

The core services PCE price index jumped by 4.9% annualized In March, from February (blue). The three-month reading jumped by 5.5% annualized, the worst since February 2023.

Housing PCE price index jumped by 5.4% annualized in March from February. The three-month reading jumped by 5.7% and has been in this range for eight months in a row.

The housing index is broad-based and includes factors for rent in tenant-occupied dwellings; imputed rent for owner-occupied housing, group housing, and rental value of farm dwellings.


Other core services are super-volatile month to month, so here are the PCE price indices on a six-month annualized basis. Five of the seven categories accelerated in March on a six-month basis; only two decelerated:

  • Healthcare: +3.5% (acceleration)
  • Transportation services: +5.4% (acceleration). Motor vehicle maintenance and repair, car rentals, parking fees, tolls, airline fares, etc.
  • Financial services & insurance: +6.0% (acceleration).
  • Non-energy utilities: +5.3% (acceleration).
  • Other core services: +3.8% (acceleration). Broadband, cellphone, other communications; delivery; household maintenance and repair; moving and storage; education and training; legal, accounting, and tax services; dues; funeral and burial services; personal care and clothing services; social services such as homes for the elderly and rehab services, etc.
  • Recreation services: +4.1% (deceleration). Cable, satellite TV & radio, streaming, concerts, sports, movies, gambling, vet services, package tours, maintenance and repair of recreational vehicles, etc.
  • Food services & accommodation: +3.1% (deceleration). Restaurants, hotels, motels, vacation rentals, cafeterias, cafes, delis, etc……


Continue reading this article Wolf Street.

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