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US Inflation Is Declining, And The Economy Is Supported By Consumer Spending

US Inflation Is Declining, And The Economy Is Supported By Consumer Spending
With the cost of goods and services other than housing and energy declining sharply in February, U.S. prices softened and the Federal Reserve's June interest rate decrease remained on the table.
The strength of the economy was highlighted by the Commerce Department's report on Friday, which also revealed that consumer spending increased last month for the first time in little over a year. Because of the country's robust labour market, the US continues to do better than its international counterparts even with higher borrowing rates.
"Core services inflation is slowing and will likely continue throughout the year," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. "By the time the Fed meets in June, the data should be convincing enough for them to commence its rate normalization process."
The Bureau of Economic Analysis of the Commerce Department said that last month's personal consumption expenditures (PCE) price index increased by 0.3%. Data for January was reclassified to reflect a 0.4% increase in the PCE price index, as opposed to the 0.3% previously stated. According to Reuters polled economists, the PCE price index was expected to increase by 0.4% for the month.
The cost of petrol and other energy items increased by 3.4% last month, which contributed to a 0.5% increase in goods prices.
The costs of autos, apparel, footwear, and leisure products all saw significant price hikes. However, costs for durable manufactured products such as furniture and appliances were muted.
PCE inflation increased 2.5% in the year ending in February, following a 2.4% increase in January.
On Thursday, the S&P 500 recorded its best first-quarter gain in five years, even though U.S. stocks ended the day mostly unchanged.
Price pressures are lessening, although at a slower rate than in the first half of the previous year, and inflation is still higher than the 2% objective set by the US central bank.
The inflation statistics for February, according to Fed Chair Jerome Powell on Friday, were "more along the lines of what we want to see."
Fed officials raised the policy rate by 525 basis points since March 2022, but they held it unchanged last week in the current range of 5.25% to 5.50%.
Three rate decreases are anticipated by policymakers this year. The first rate cut is anticipated by the financial markets in June. The foreign currency exchange market was open on Good Friday, while most other U.S. financial markets were closed.
According to the data, the dollar fell relative to a basket of currencies.
With the volatile food and energy components excluded, the PCE price index saw a 0.3% gain in the previous month. That came after January's upwardly revised 0.5% growth. According to earlier reports, the so-called core PCE price index increased by 0.4% in January.
Following a 2.9% increase in January, core inflation grew 2.8% year over year in February, the lowest increase since March 2021. For monetary policy purposes, the Fed monitors PCE price measures.
Over time, monthly inflation readings of 0.2% are required to return inflation to target. Some stickiness persists even if new weights prevented the PCE pricing data from reproducing some of the firmer values from the producer and consumer price surveys.
Over the last three months, core inflation has risen at an annualised pace of 3.5%.
After rising by 0.6% in January, the price of services increased by 0.3% in February. Housing and utility costs increased by 0.5%. The cost of insurance, financial services, and recreational services all saw significant price hikes.
However, the price of eating out, lodging, and hotel rooms remained the same, while the cost of healthcare and transportation services only slightly increased.
After rising by 0.7% in January, PCE services inflation, excluding energy and housing, increased by 0.2% in the previous month. After climbing 3.5% in January, the so-called super core rose 3.3% year over year. The super core data is being watched by policymakers to see how well they are doing in containing inflation.
It has increased by 4.5% over the last three months, according to some economists, supporting a postponement of rate decreases. However, some suggested that the high figure did not indicate a change in the trend and was instead the product of the price rise in January.
"The six drivers of the surge in core inflation in 2021-to-22 - expanding margins, rapid wage gains, exploding rents, supply chain chaos, and pass-through from higher global food and energy prices - have all normalised or are in the process of normalising, with no real signs of any reversal," stated Ian Shepherdson, chief economist at Pantheon Macroeconomics
"That means the fundamental pressure on inflation is to the downside, but odd things can happen in individual months without changing the bigger picture."
The amount spent by consumers, who make up over two thirds of the American economy, increased by 0.8% in the previous month. It came after a 0.2% increase in January and was the biggest advance since January 2023. After declining by 0.2% in January, consumer expenditure increased by 0.4% when accounting for inflation.
The rise in "real consumer spending" indicated that the first quarter's consumption momentum was probably maintained. The Atlanta Fed increased its forecast for the growth of the gross domestic product this quarter from a 2.1% pace to an annualised rate of 2.3% as a result.
The Census Bureau's report, which showed that both wholesale and retail inventories rose sharply in February and countered a 1.5% increase in the goods trade deficit, also provided support for growth predictions.
However, a large portion of the expenditure came from savings as income increased by 0.3% following an acceleration of 1.0% in January due to a special dividend from Costco Wholesale Corporation. After deducting taxes and inflation, family disposable income decreased by 0.1%. From 4.1% in January, the saving rate fell to 3.6%, the lowest since December 2022.
"As long as employment growth remains strong, it can underpin solid spending, however, consumers overall are not prepared for a weakening in the labor market should it unfold," said Kathy Bostjancic, chief economist at Nationwide.

Christopher J. Mitchell

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