Two New Economic Reports That Point to Cooling Inflation

But a lot of professionals are still betting on another interest increase in May.

This is a day of good news on the inflation front that may not matter to the Federal Reserve, at least for now.

First, compensation costs for private workers were up a seasonally adjusted 1.2% for the first quarter of 2023, according to the Bureau of Labor Statistics. Wages and salaries were up 1.2% as were benefit costs. The 12-month not seasonally adjusted figures were 4.5% for overall compensation, with a 4.7% increase in wages and salaries and 4.1% increase in benefits.

That’s a definite slowdown compared to December’s 5.1% read on one-year growth in wages and salaries.

And then Bureau of Economic Analysis estimates said that personal income increased by 0.3% in March, with disposable personal income (money left after taxes) up 0.4% and personal consumption expenses (PCE)—an important figure for the Fed—up less than 0.1%. That last figure is down significantly from the 0.3% in February and 0.6% in January. Then again, after factoring out food and energy for core PCE, the figure was still 0.3%.

When looking at PCE on a 12-month basis, it was up 4.2% in March, versus 5.1% in February and 5.4% in January. PCE without food and energy was 4.6% in March and 4.7% in both February and January.

When it comes to the Fed’s Federal Open Market Committee, all this may be news that’s encouraging but not good enough.

“The Fed’s preferred measure of inflation slowed sharply in March, but core PCE is still persistently high,” said Bill Adams, chief economist for Comerica Bank, in emailed comments. “This reflects the long lags by which increases in housing prices and rents over the last few years flow through into measured consumer prices. Inflation of labor-intensive service prices also continues to run faster than pre-pandemic norms, contributing to over-target inflation.”

But Adams, and other economists whose comments came to, are all fairly certain that the FOMC will raise interest rates by another 25 basis points to a range between 5% and 5.25%. The impact on CRE financing would seem clear: more of the same you’ve been experiencing.

The big question now is not what will happen in May, which seems a given, but rather in June onward.

“In all, these inflation and wage readings keep the Fed on target for another 25bps rate hike in the fed fund rate to 5% – 5.25% next week,” Nationwide Chief Economist Kathy Bostjancic wrote in emailed remarks. “However, we see that as the last hike this cycle and look for the Fed to keep rates at that restrictive level throughout 2023.”

Is that realistic? Quincy Krosby, chief global strategist for LPL Financial had a more restrained view: “Financial markets continue to doubt Jerome Powell’s resolve in restoring price stability despite his steadfast position that the Fed must not allow 1970s style stagflation take hold with pauses between rate hikes.”

And both inflation and wages, which the Fed sees as a major element to increased prices, continue to grow at twice the target inflation rate. While that happens, chances seem stronger for yet another rate hike in June.