Key Inflation Gauge Soars to Highs Not Seen Since 1982

A trader on the floor of the New York Stock Exchange (NYSE) on June 27, 2022. Spencer Platt/Getty Images

A key inflation gauge the Federal Reserve tracks closely when setting interest rates jumped in June to its highest level in 40 years, suggesting the Fed’s fight to take the sting out of price pressures may be drawn out.

The Personal Consumption Expenditures (PCE) price index, released on July 29 by the Bureau of Economic Analysis (BEA), rose from an annualized 6.3 percent in May to 6.8 percent in June—marking the fastest pace of year-over-year price acceleration since 1982.

On a month-over-month basis, the PCE inflation gauge sped up from 0.6 percent in May to 1 percent in June, the fastest since 1981.

The so-called core PCE price index, which excludes food and energy and is the main PCE benchmark by which the Fed measures the pace of inflation against its 2 percent target, rose from an annual 4.7 percent in May to 4.8 percent in June.

In February 2022, the core PCE gauge clocked in at a multi-decade high of 5.3 percent, followed by 5.2 percent in March, 4.9 percent in April, and 4.7 percent in May, with some analysts dismissing June’s 0.1 percentage point uptick as a minor blip in an otherwise falling trend.

“Went up slightly (0.1%) in June but still a clear stabilizing/downward trend on core inflation (key metric for FED),” CrowdStrike co-founder Dmitri Alperovitch said in a tweet.

On a month-over-month basis, core PCE inflation gauge accelerated from 0.5 percent in May to 0.6 percent in June, the fastest since April 2021.

All four PCE measures came in above market expectations.

Fed Pivot Likely Or ‘Delusional’?

Traders and market analysts have increasingly been speculating whether a slowing U.S. economy and signs of inflationary pressures potentially easing will prompt the Fed to pivot in its tightening cycle and either pause hiking rates or reverse course entirely and begin to loosen monetary settings.

But hopes that the Fed will hit pause are “delusional,” according to Julian Bridgen, co-founder of Macro Intelligence 2 Partners.

“Stocks are still using the 2009-21 playbook ie as growth slows the Fed eases. But we now live in a pre GFC world, where inflation not deflation is public enemy no.1. Hence, with ECI @ 5%, PCE @ 6.8 they are delusional,” he wrote on Twitter.

“The only pivot we are getting is to 50bps vs 75bps hikes,” he added.

At its most recent policy meeting on July 27, the Fed opted for a 75 basis point rate hike, with Fed Chair Jerome Powell saying another big rise could be on the table if warranted by the data.

But traders are betting that the Fed will opt for a 50 basis point hike in September, with federal funds futures contracts putting the odds of a 0.5 percentage point rise at 73 percent and the chances for a 0.75 percentage point hike standing at 27 percent.

The Fed’s current target interest rate range is between 225 and 250 basis points.

By contrast, some analysts believe that the current economic slowdown will weigh more heavily on the Fed’s decision-making than elevated inflation.

“I still think a data dependent Fed, given a choice between growth and fighting Covid-driven inflation, will choose growth and pivot on rates later this year,” Gary Black, Managing Partner at The Future Fund LLC, wrote on Twitter.