Is another inflation scare coming? GDP seems to say yes.

By Jeffry Bartash

PCE index signals worse inflation in first quarter

A surprisingly high inflation reading in the first quarter has raised anxiety about whether a key price index in March could be worse than expected and could lower the odds of U.S. interest-rate cuts.

Gross domestic product, the official scorecard of the economy, showed that inflation rose at a 3.4% annual rate in the first quarter, compared with 1.8% in the final three months of 2023.

The core rate of inflation, which omits food and energy, also recorded a 3.7% annual rate of increase in the first quarter, up from 2%.

Economists had only expected the core rate, which is viewed as a better predictor of future inflation trends, to move up to 3.4%.

What's the worry?

Before the GDP report, Wall Street had forecast a 0.3% increase in both the headline and core personal-consumption-expenditure indexes in March. The March report comes out Friday morning.

Yet if taken at face value, the GDP report suggests both indexes could show gains of either 0.4% or 0.5%. That's worse than the Federal Reserve or investors had expected.

Such large increases would also suggest inflation is no longer slowing, and perhaps worse, that it might even be on the rise again. The Fed is trying to get the rate of inflation down to 2%.

What's more, another poor PCE report could push Fed rate cuts to the early fall - or even further out.

Some analysts are skeptical the March PCE report will be so negative.

They point out that the PCE report is derived in part from previously released surveys of consumer and wholesale prices. Neither the consumer-price index nor the producer-price index in March hint at 0.4% or 0.5% PCE readings.

"Such a large miss for March seems implausible, as one can typically estimate month-to-month core PCE inflation to within a few basis points based on the CPI and PPI data for the month," economists at Bank of America wrote in a note.

What's more likely, economists say, is that the government revises up the PCE inflation readings for January and February.

Does it matter?

Investors and the Fed already know inflation picked up in the first two months of the new year. The core PCE index jumped 0.3% in February and 0.5% in January after hardly any increase in the last three months of 2023.

If the January and February numbers are revised higher and the core reading in March comes in at 0.3%, it would at least be a sign that inflation didn't get any worse last month.

Not that it would be of great comfort to investors, consumers or businesses that had been expecting rate cuts this year.

"Even if the March PCE inflation measures rise just 0.3% when reported tomorrow, as expected, they will be accompanied by upward revisions to January or February," said chief economist Chris Low of FHN Financial. "As a result, as we already know from the [GDP] numbers reported, inflation in the quarter was ugly."

-Jeffry Bartash

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

04-25-24 1334ET

Copyright (c) 2024 Dow Jones & Company, Inc.