US Feb PCE prices index shows inflation picture still a conundrum

(Reuters) - The Personal Consumption Expenditures (PCE) price index increased 0.3% in February after advancing by an unrevised 0.3% in January, the U.S. Commerce Department said on Friday. Economists had forecast the PCE price index gaining 0.3%.

In the 12 months through February, prices increased 2.5%, matching January's rise. Stripping out the volatile food and energy components, the price index rose 0.4% after an unrevised 0.3% advance in January. In the 12 months through December, core inflation increased 2.8% after rising 2.7% in January.

The U.S. central bank tracks the PCE price measures for its 2% inflation target.

MARKET REACTION:

STOCKS: S&P 500 emini futures added to a slight loss and were off 0.35%, pointing to a soft open on Wall Street

BONDS: U.S. Treasury 10-year yield moved a bit lower to at 4.3110% and the two-year yield was fractionally lower at 3.98%

FOREX: The dollar index pared a bit, 0.13% firmer

COMMENTS:

KIM FORREST, CHIEF INVESTMENT OFFICER, BOKEH CAPITAL PARTNERS, PITTSBURGH

"There's a blessing and a curse - consumer spending held up, but inflation came in a little hotter. The market looks a little 'sad' but not terribly sad... inflation was hotter than expected but it didn't come in terribly hot. I don't think we can say it's "killed" necessarily, but it's not quite enough to make people stop spending. I don't think we'll see bad things happen in the stock market today."

"The Fed is reluctant to cut rates because they're wary of adding to the inflationary burden, especially with new tariffs. This (data) looks like all things status quo, which should comfort the market."

ERIC BEYRICH, EQUITY PORTFOLIO MANAGER AND CO-CHIEF INVESTMENT OFFICER, SOUND INCOME STRATEGIES, NEW YORK

“So the core PCE at 2.4% is kind of in line with where it's been for a year. That's not a surprise the market-based PCE is actually down from where it was in December. It's just up from January so it's just within the normal noise. Basically, I don't see any real signal here that marked a change or really an acceleration. Everything was very slight. I know the markets are going to react to the blaring headlines perhaps but it's one of these things where you know there really isn't a lot to say. . . I think that the only story that you can take from this is the consumer spending was down, but it's not much of a story because the weather was dramatically worse this February than it was last year.”

WASIF LATIF, PRESIDENT AND CHIEF INVESTMENT OFFICER, SARMAYA PARTNERS, PRINCETON, NEW JERSEY

“Thesis that we’ve had for longtime is still intact – which is that inflation is still with and still lurking in the system. There are different reasons why it’s stubbornly there, including concerns around tariffs and those situations. You could say that some of that was due to a lot of the buying by people in advance of the impending tariffs. But it’s clear the tariff impact is driving inflation now – which ultimately might slip into areas of the market including stubborn wages etc.”

ELLEN ZENTNER, CHIEF ECONOMIC STRATEGIST, MORGAN STANLEY WEALTH MANAGEMENT, NEW YORK (by email) 

"It looks like a “wait-and-see” Fed still has more waiting to do. Today’s higher-than-expected inflation reading wasn’t exceptionally hot, but it isn’t going to speed up the Fed’s timeline for cutting interest rates, especially given the uncertainty surrounding tariffs." 

JORDAN RIZZUTO, CHIEF INVESTMENT OFFICER, GAMMAROAD CAPITAL PARTNERS, NEW YORK"This data further lends credence to the marginal shift we're seeing towards a more stagflationary environment. "If inflation is picking up or running hotter coming into a period before we've actually seen the impact from tariffs, that's rather concerning. It also puts the Fed in an even tougher place since they're walking the tightrope between remaining restrictive enough to keep inflationary pressures at bay and still running accommodative enough to balance and support the economic picture.

"We expect to see more volatility at the front end of the curve and to the degree that we continue to get hotter than expected data. Consumers are stocking up on certain items ahead of time if they anticipate future price increases. But that said, the recent weakness in consumer confidence suggests that they're limited in the degree to which they can pull a lot of purchases forward.

"We expect the current environment to be characterized by higher volatility and we're certainly seeing that at the moment."

DAN SILUK, HEAD OF GLOBAL SHORT DURATION & LIQUIDITY, PORTFOLIO MANAGER, JANUS HENDERSON (by email)

"The latest PCE report presented mixed results, with headline figures aligning with expectations, while core numbers reveal a slight but notable increase, coming in a tenth higher than anticipated on both month-over-month and year-over-year metrics. This upward trend in surprises is underscored by the fact that this is the second-largest core PCE print in the last 24 months, highlighting persistent inflationary pressures. Such resilience in core inflation, persistently above the Federal Reserve's target, suggests expectations for a shift in monetary policy may need to be recalibrated, potentially affecting the timing of interest rate adjustments. As the market digests these figures, all eyes will be on the upcoming April 2nd Tariff Day, which represents the next significant event risk for investors. Even then, it is anticipated that this will likely pose more questions than provide answers, adding another layer of uncertainty in an already complex economic environment.”

(Compiled by the Global Finance & Markets Breaking News team)