Fed to be encouraged by fading of core PCE but hikes may continue

(Alliance News) - A key US inflationary gauge, and one preferred by the Federal Reserve, ticked lower last month, though likely not by enough to prompt the central bank to pause rate hikes.

The core personal consumption expenditures index grew 4.6% on-year in February, slowing from a 4.7% rise in January. The advance fell short of FXStreet cited consensus which had pencilled in another 4.7% hike.

Core PCE is the Fed's preferred inflationary gauge.

The wider headline PCE index grew 5.0% in February, slowing from 5.3% in January. January's outcome was downwardly revised from 5.4%.

An advance of 5.3% was also expected for February, according to consensus cited by FXStreet.

Capital Economics analyst Paul Ashworth commented: "Fed officials will be slightly encouraged by the 0.3% month-month increase in the core PCE deflator, with January's gain trimmed to 0.5%, from 0.6%. Nevertheless, inflation remains too high, with the annual and three-month-annualised rates both above 4.5%."

Pantheon Macroeconomics analyst Ian Shepherdson said the PCE result was a "welcome development".

"Fed officials have been very clear that they want to see a run of smaller increases before they’ll be convinced that inflation is on its way back to the target. But the February numbers offer some hope, at the very least, especially in the core services ex-rent component, which the Fed has emphasized in recent months. The 0.27% increase in February was the best since an out-of-the-blue dip in July last year, and our chart suggests that the trend is slowing. The March report, due just a few days before the May FOMC meeting, is now a hugely important release," Shepherdson added.

There was hope heading into the data that a weaker PCE reading would strengthen the case for the central bank to consider easing off the monetary policy throttle pedal.

Analysts at Briefing.com said the Fed may not be at that stage yet.

"The key takeaway from the report is that it only showed a slight deceleration in the year-on-year PCE and core-PCE price indices, which gives the Fed an argument to continue hiking rates," Briefing.com analysts said.

By Eric Cunha, Alliance News news editor

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