'Big Upside Surprise': Experts React To 4.7% Core PCE Inflation As Interest Rate Expectations Continue To Rise

The SPDR S&P 500 ETF Trust SPY SPY traded lower Friday morning after the Bureau of Economic Analysis reported a 5.4% increase in the personal consumption expenditures (PCE) price index in the month of January, the latest signal the Federal Reserve is struggling to bring down inflation.

What Happened: The headline PCE rose 5.4% in January. That's up from a 5.3% gain in December but still well below its 2022 high of a 7% increase in June. The January PCE reading came in well above economist estimates of 4.9%.

Core PCE inflation, which excludes volatile food and energy prices, was up 4.7% in January, above economist estimates of 4.3%.

The BEA said personal income was up 0.6% on a monthly basis in January.

Related Link: Fed's Preferred Inflation Measure Bounces In January: What You Need To Know

Earlier this month, the Labor Department reported the Consumer Price Index (CPI) was up 6.4% in January, down from a 2022 peak of 9.1% in June. The Labor Department also reported U.S. wages grew 4.4% year-over-year in January.

The Federal Reserve is likely closely monitoring the PCE data ahead of its March meeting. The bond market is pricing in a 76% chance the Fed will raise interest rates by another 0.25% next month, bringing its fed funds target range to between 4.75% and 5%.

The Fed has been raising interest rates since early 2022 in an attempt to bring down inflation. Rising interest rates weigh on the valuations of risk assets like stocks and bonds, but falling bond prices have pushed bond yields higher.

Related Link: US Recession Risk At Its Highest In 40 Years: Why Is The Stock Market Ignoring The Economy?

Voices From The Street: Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said Friday the PCE data reinforces the idea that the Fed still has a lot more work to do to get inflation under control.

"It is far too early to extend duration and buy the dips in bond prices, let alone trying to continue to buy the dips in the stock market," Zaccarelli said.

Jeffrey Roach, chief economist for LPL Financial, said investors can expect the stock market to remain choppy as the Fed continues to raise rates.

"The Fed may still decide to hike by 0.25% at the next meeting, but this report means that the Fed will likely continue hiking into the summer," Roach said.

Bill Adams, chief economist for Comerica Bank, said the stickier inflation is in 2023, the more aggressive the Fed will be with its tightening and the weaker the economy will be in 2024.

"Comerica’s next interest rate forecast will have the Fed raising the federal funds target to a peak level of 5.25%-to-5.5% in June, and holding it at that level until a first rate cut at the March 2024 decision," Adams said.

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