Good news for markets as the Fed’s favorite inflation gauge may have peaked

Today’s PCE inflation numbers were relatively good for the markets indicating that inflation may be heading lower during the summer. The annual price change for April 2022 was 6.3%. That’s down from 6.6% in March, as prices of goods rose at a slower pace than previously and increases in prices of services rose at a rate broadly similar to recent months.

After excluding food and energy, annual inflation fell to 4.9%, a growth rate we last saw in December 2021. It’s too early to be sure, but inflation could be trending lower. Of course, inflation is still well above the Fed’s 2% target, but the trend is likely to be positive.

The Metric The Fed watches

This is important because PCE inflation is a metric that the Fed is clearly monitoring, and was mentioned seven times in the minutes of the May 2022 Fed meeting. The minutes also made clear how concerned the Fed is about inflation. The recent inflation data may allow for a somewhat calmer stance at the upcoming Fed meeting and perhaps a less hawkish stance on interest rates.

Has inflation peaked?

Inflation is a relatively noisy streak from month to month and inflation remains stubbornly high by historical standards. However, there are signs in today’s report that inflation may have peaked, assuming no other major events such as the turmoil in energy markets or the widespread Chinese shutdown.

High inflation in the past wasn’t something the Fed was comfortable saying at its May meeting earlier this month, so if this continues, it could eventually lead to a change in their thinking. It will also take a few more months of data to confirm the trend, but those concerned about inflation rising from here could rest at least some of the recent numbers.

CPI . data

Also, separate CPI data for April 2022 told a similar story with a sudden slowdown in monthly price increases, with auto and used clothing prices actually dropping month on month and the energy chain, remaining high but falling back from the cap. March hikes.

If inflation comes down, the Fed may have the opportunity to undo some of the more aggressive rate increases planned for 2022. That is likely to be positive for both the stock and bond markets.

Currently, the fed funds rate is expected to move from just under 1% today to closer to 3% by December 2022 according to futures markets. However, with the recent inflation news, markets are now viewing more extreme rate hike scenarios as less likely.

Prices are still expected to rise, but perhaps not by much and very quickly. A “double” 50 basis point rise next month is still on the cards from the point of view of most Fed watchers, but then expectations about how quickly interest rates will rise began to wane.

Good news for the markets

In general this is good news for the markets. Inflation fears and the Fed’s possible reaction to it have been a major driver of the bear market for many stock indices in recent months.

Of course, there is no drastic change, it is likely that we are still in a price hike environment of 2022, but perhaps some of the more extreme interest rate scenarios become less likely if inflation does indeed peak. Of course, we’ll learn more once the May CPI data is released on June 10. The Fed will see that before the meeting scheduled for June 14-15 to set rates.