Higher Interest Rates Seen More Likely as Inflation Speeds Up and Consumers Spend

Updated at 12:48 pm EDT

The Federal Reserve's preferred measure of U.S. inflation quickened again in April, data indicated on Friday, suggesting the central bank's effort to tame consumer-price pressures will likely last well into the summer months. 

The April core PCE Price Index rose 4.7% from last year, up from the revised 4.4% pace recorded in March and coming in higher than the consensus Wall Street forecast of 4.6%. The core index was up 0.4% on the month, the Bureau of Economic Analysis reported, just ahead of both last month's pace and the Wall Street consensus forecast of 0.3%. 

The headline PCE index rose 0.4% on the month and 4.4% on the year, with both readings coming in hotter than analysts' forecasts. Personal incomes rose by 0.4% while real personal spending rose 0.8% from March, the BEA noted, firmly ahead of Wall Street forecasts of a 0.4% gain.

Commerce Department data published Thursday showed the closely tracked core PCE price index for the first quarter, one of the Federal Reserve's favored inflation metrics, accelerated at a 5% pace, topping the first estimate of 4.9% reported earlier this month.

"The (market) consensus for the core PCE deflator always looked a bit ambitious, given the CPI numbers and the likely upward pressure from the financial services component," said Ian Shepherdson of Pantheon Macroecnomics. 

"So we aren’t disappointed by the 0.4% core print, but we are disappointed by the core services [excluding the] rent component, which rose 0.42%, the biggest increase in three months."

Higher Risk of a Fed Rate Hike in June

"These data raise the risk that the Fed will hike again in June, though our base case remains that rates will be left on hold. Another big payroll print next week, however, would change that," he added.

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U.S. stocks were modestly firmer following the data release, and extended gains throughout the session, with the Dow Jones Industrial Average rising 322 points by mid-day and the S&P 500 gaining 53 points amid reports of a breakthrough in debt ceiling talks between lawmakers in Washington.

Benchmark 2-year Treasury note yields gained 12 basis points to 4.608%, while 10-year notes were pegged 5 basis points higher at at 3.833%. The U.S. dollar index, which tracks the greenback against a basket of its global peers, was marked 0.15% higher at 104.398. 

"Prices rose more than expected this morning, with the 10-year rising above 3.8% for the first time since February," said Peter Essele, head of portfolio management for Commonwealth Financial Network in Waltham, Mass. 

"The rise in prices puts a June hike back in play, perhaps even greater than a quarter percent hike in a last-ditch effort by the Fed to put out the inflationary fire once and for all." 

At their May policy meeting Fed officials in fact stressed the need to keep their rate hike options open, with some noting that "based on their expectations that progress in returning inflation to 2% could continue to be unacceptably slow, additional policy firming would likely be warranted at future meetings."

CME Group's FedWatch is currently pricing in a 63.1% chance of a 25 basis point rate hike in June, up from just 17.4% a week ago, with bets on a move higher in July pegged at around 79.6% should the Fed decide to pause. 

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