Key Fed Inflation Rate Eases As Powell Shifts Goalposts; Dow Jones Slips

The Fed's key gauge of core inflation rose less than expected in October as the core inflation rate eased to 5%, but the Dow Jones slipped.

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May 14, 2023 • 3 min read

Dow Jones fell in the early morning stock market after Wednesday's rally, which was sparked by Fed chief Jerome Powell explaining what will be required to end rate hikes. The S&P 500, however, and the Nasdaq posted modest gains on Thursday morning.

PCE (personal Consumption Expenditures) Price Index rose 0.3% for the month. PCE inflation rates continue to decline from the 40-year high reached in June of 7% to 6%. Core prices minus energy and food rose only 0.2% in the month, as the core inflation rate fell from 5.2% to just 6%.

Wall Street expected a 0.4% rise in the PCE Price Index and a 0.3% increase excluding food and fuel.

Separately the Labor Department reported a decline of 16,000 new claims for unemployment benefits to 225,000 during the week ending November 26. The number of people who continue to claim benefits increased by 57,000 in the previous week to reach 1.608 millions.

Powell said in his speech on Wednesday that the core PCE price index is the best indicator of inflation. Powell said that core PCE inflation has been fluctuating between 5.x% and 5.x% but has not progressed since the beginning of the year.

Powell did acknowledge that inflation in goods is waning. Powell said the rate of inflation for new rent prices for tenants has also "fallen sharply." Powell said that once the majority of leases come up for renewal in 2023, housing inflation measures should start to drop.

This sounds like the elevated inflation will soon be over, which helped spark a wide rally on Wednesday for the Dow, S&P 500, and particularly the Nasdaq.

Powell made the case for tightening policy based on a second area of concern to Fed policymakers, namely core services inflation without housing. This accounts for over 50% of the PCE core price index. It includes categories like health care, education and haircuts.

Powell stated that this category may be most important for understanding future core inflation, as price changes are closely linked to wage growth. He said that the labor market is key to this inflation category.

Powell's chart shows that core services less housing have been running slightly above 4.5 percent. The statistic is not unique to the PCE monthly report.

Powell explained in a Q&A that the wage growth rate, which was close to 5% at one point, needed to drop to 3.5% for inflation to remain within 2%.

Powell, while reiterating his point of view that the chronic inflation in the 1970s led to the double-digit unemployment rate, cautions the Fed against letting down its guard too early.

Powell has now provided a clear direction to help keep Fed policymakers together, even as some express concerns about an over-tightening. The Fed will begin to ease its stance once wage growth falls below 3.5%.

It could be either good or bad for the Dow Jones depending on whether wage growth continues.

The Dow Jones fell 0.3% after the PCE inflation report and the jobless claims report, following Wednesday's gains of 2.2%. The S&P 500 gained 0.3%, and the Nasdaq Composite 0.5%.

The Dow Jones Industrial Average is only 6% lower than its record high closing on January 4. The Dow Jones industrial average has risen 20.4% since its September 30 52-week low. S&P 500 remains 14.9% below all-time high but has risen 14.1% since its 52-week-low. The Nasdaq remains 28.6% below its peak but is up 11.1% since its bear-market closing low.

The yield on the 10-year Treasury fell by 8 basis points, to 3.62%. This is near a 2-month low.

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