The Dow Jones Industrial Average surged nearly 600 points on Friday as investors breathed a sigh of relief after the Federal Reserve’s recommended inflation gauge met Wall Street expectations, rekindling optimism for interest rate cuts.
The Commerce Department’s Bureau of Economic Analysis said Friday that the personal consumption expenditures (PCE) price index rose 0.3% last month, matching the unrevised rate of increase in March.
In the 12 months through April, the PCE price index rose 2.7 percent after rising at the same pace in March. Economists surveyed by Reuters had expected a 0.3 percent month-on-month increase and a 2.7 percent year-on-year increase.
Friday’s data suggested the pace of price increases may continue for longer than expected, but also suggested weak consumer spending could keep price growth in check in coming months.
“People have been struggling for a while and it’s likely starting to show. This cooling is encouraging for slowing inflation in the coming months,” said Elizabeth Lenter, senior economist at NerdWallet.
The blue-chip Dow Jones Industrial Average, which had been falling all week since breaking through the 40,000-point barrier for the first time earlier this month, rose 574.84 points on Friday to close at 38,686.32.
A futures trader that tracks the Federal Reserve’s interest rate Add to It now sees roughly equal odds that the central bank will begin cutting interest rates in September, and also raised the chances of a second rate cut in December to roughly the same.
Friday’s report also showed income growth slowed and spending cooled sharply in April, trends that could moderate economic growth and inflation in coming months and please the Fed.
Fed Chairman Jerome Powell said he expects inflation to rise in the first three months of 2024 before falling again in the coming months.
But Powell warned that the central bank needs “greater confidence” that inflation is slowing sustainably before considering cutting rates.
“April was a step in the right direction, but there’s still a lot of work to be done,” said Stephen Stanley, chief U.S. economist at investment bank Santander.
The PCE price index, which excludes the volatile food and energy components, rose 0.2% in April after increasing 0.3% in March.
Core inflation rose 2.8% year-on-year in April, the same rate of increase as in March.
Gasoline prices rose 2.7% last month, while food prices fell, according to Friday’s report, though they are still significantly higher than before the pandemic.
Prices of long-lasting goods also fell, mainly due to cheaper new and used cars, furniture and home appliances.
Used car prices have fallen about 5% over the past year.
Prices of goods rose 0.2 percent and services increased 0.3 percent.
For example, restaurant dining increased 0.3% from March to April and is up 4% year-over-year.
Entertainment costs such as movies and concerts rose 7.4% from the previous year.
Dan North, senior economist at Allianz Trade, said the figures were unimpressive.
“The core index was at 2.8%, which is good, but it’s been trading in a range for the last five months, which to me has been pretty stable,” North told CNBC.
“If I [Fed Chair Jerome] Powell, I’d love to see it start to go down, but it’s just barely creeping down. … I haven’t reached for the Pepto yet, but I’m not feeling great. This is not something you guys want to see.”
One key Fed figure, New York Federal Reserve Bank President John Williams, said Thursday he expects inflation to start slowing again later this year.
But until that happens, Powell has made clear the central bank is prepared to keep interest rates on hold at a 23-year high of 5.25% to 5.50%.
The Federal Reserve has raised borrowing costs by 525 basis points since March 2022 to cool demand across the economy.
Financial markets initially expected the first rate cut to come in March, but that was then pushed back to June and now to September.
With post wire
