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March PCE of 2.7% Comes in High

This morning, we got the March Personal Consumption Expenditures (PCE) report. This is the preferred inflation gauge of the Federal Reserve. The PCE was up .3% vs last month and 2.7% vs last year. This was above expectations of 2.6%. The Core PCE, which excludes food and energy, was up .3% vs last month and 2.8% vs last year. This was also 0.1% above expectations of 2.7%.

This report shows a continuation of prior trends with sticky or rising inflation and rising income. Personal income was up 0.5% in the month which annualizes to 6.2%. Spending was up 0.8% for the month which annualizes to 10.0%. With spending increases greater than pricing increases, we can conclude that consumers are spending more and also buying more. While income exceeded price increases this month, spending was up even more than income. It’s worth pointing out that the government is still engaging in massive fiscal stimulus. For the people still insisting Americans should be more grateful for disinflation (a reduction in the rate of inflation), the following chart explains the reason so many are still irritated and worried about price increases.

DKI has been saying for two years that rate cuts will come later than most market participants expect. We came into this year insisting we wouldn’t see 6 cuts (for a total of 1.5%) this year. Expectations are now down to 3 cuts starting in September. Given sticky and increasing inflation plus continued multi-trillion-dollar fiscal stimulus out of Washington DC, DKI thinks higher for longer applies to both interest rates and inflation. No change in opinion. if you have any questions.


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