Consumer price index data for March showed that core inflation ran hotter than expected last month. The S&P 500 opened sharply lower in early Wednesday stock market action after the CPI inflation data, as markets weighed the implications for the Fed rate-cut outlook.
decisions on interest rates impact both the economy and the stock market. IBD News Editor Ed Carson shares how reactions by each can differ and what investors need to know.” data-nosnippet=”true” data-permalink=”https://www.investors.com/ibd-videos/videos/fed-interest-rate-cuts-hikes” jw-video-key=”cReAVOpP” vid-authors=”MEREDITH HEYMAN” vid-cat=”Industry Insights” vid-date=”03/20/2024″ vid-date-tmsp=”1710938202″ vid-dom-id=”9029322-6616a0dcddce8″ vid-id=”9029322″ vid-image=”https://10xwealthreport.com/wp-content/uploads/2024/04/echo/cReAVOpP-640×360.jpg” vid-name=”Fed Interest Rate Decisions: Market Influence And Investor Psychology Impact Of Cuts And Hikes” vid-repeat=”1″ vid-top=”false” vid-url=”https://content.jwplatform.com/manifests/cReAVOpP.m3u8″ vid-width=”50″> X
CPI Inflation Report Hits And Misses
The overall consumer price index rose 0.4% on the month amid higher gas prices, above 0.3% forecasts. The 12-month CPI inflation rate ticked up to 3.5% from 3.2% in February, matching predictions.
The core CPI, which strips out volatile food and energy prices, rose 0.4% vs. February levels, above 0.3% estimates. The annual core CPI inflation rate held at 3.8%. Wall Street’s consensus forecast was 3.7%, according to Econoday. The core CPI inflation rate peaked at a 40-year-high 6.6% in September 2022.
Upon closer inspection, the core CPI wasn’t quite as bad as the headline, rising 0.359% on an unrounded basis.
More CPI Details
So what accounted for the bigger-than-expected increase in core prices? Transportation services prices rose 1.5% on the month. That came as auto repair costs jumped 3.1% and auto insurance prices rose 2.6%.
Medical services prices increased 0.6% on the month, as health insurance prices rose 1.2%. Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted a 1.2% jump in hospital prices, lifting the 12-month inflation rate to 7.7%, the highest since April 2008.
“This likely is the lagged effect of surging wage growth in the sector” in 2022 and into 2023, even though wage growth is now slowing sharply.
Apparel prices rose 0.7%. Shelter costs rose 0.4%.
Meanwhile, energy prices rose 1.1%, with a 1.7% increase in gas prices.
Implications For The Fed’s Key Inflation Rate
The Fed’s key inflation rate, the core PCE price index, will get its March update on April 26. A day earlier, the Bureau of Economic Analysis will release PCE inflation data for Q1 with its GDP report.
Keep in mind that the core PCE price index has recently shown a tamer inflation trend than the core CPI — though not in January. Still, the current rule of thumb for looking at CPI data is that monthly increases in core prices of around 0.2% are good news and 0.3% increases may still be fine, depending on how things look below the surface. A 0.4% rise might not be great, but may not be awful.
We’ll know more on Thursday, with release of the producer price index. The PPI report includes key price data that also feeds into the PCE price index. Health care services inflation and portfolio management fees are the two biggest.
Lately, PPI health care inflation has run softer than CPI health care data. That partly reflects CPI data on health insurance, which is a poor real-time measure. Also, CPI data is based on out-of-pocket spending, while PPI data includes employer and government reimbursements to medical providers.
On the other hand, there’s some risk that the PPI will show a solid increase in portfolio management fees, which typically follow the path of stock prices with a lag.
Fed Rate-Cut Odds
After the CPI inflation data, markets were pricing in just 19% odds of a Fed rate cut by June 12, down from 54% ahead of the report.
For all of 2024, markets see 23% odds of at least three quarter-point rate cuts from the current 5.25% to 5.5% range for the Fed’s key rate. That’s down from 44% ahead of the CPI data.
Odds of one quarter-point cut or fewer jumped to 42% from 15%.
S&P 500
The S&P 500 fell 1.1% after the CPI data on Wednesday morning. On Tuesday, the S&P 500 made a late-day rebound to finish up 0.1%. The S&P 500 ended within 1% of its March 28 all-time closing high of 5254.35.
The 10-year Treasury yield jumped to 4.5%, a fresh 2024 high, from 4.365% on Tuesday.
Be sure to read IBD’s The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
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