The Federal Reserve’s preferred indicator of inflation slowed in February

The Federal Reserve’s preferred measure of inflation slowed in February, stoking optimism that the central bank is nearing the end of its rate hike campaign, even if prices remain higher than normal.

Headline consumer prices rose 5% in February from the same month last year, according to the latest Commerce Department personal consumption spending index data released on Friday.

That was down from a revised 5.3% gain in January.

On a monthly basis, headline PCE inflation rose 0.3% in January-February – a slowdown from a revised 0.6% mom increase in December-January.

PCE core inflation, which excludes volatile food and energy prices, rose 4.6% yoy and 0.3% mom.

According to data from Dow Jones, the annual increase from 4.7% in January was slightly smaller than economists had expected.

Despite some progress, inflation is still pounding US budgets and is well above the Fed’s 2% target.

The Fed’s latest forecasts from this month point to at least one more rate hike – although some pundits have argued that the recent turmoil at US banks could prompt Chair Jerome Powell and his colleagues to pause rates until the end of the year or even lower .

“The inflation trend looks promising for investors,” said Jeffrey Roach, chief economist at LPL Financial.

“Inflation is likely to be below 4% by the end of the year, giving the Federal Reserve some leeway to cut rates through the end of the year if the economy goes into recession,” Roach added.

US stocks traded higher after PCE inflation report emerged.

The Dow Jones Industrial Average rose more than 160 points.

The tech-heavy Nasdaq was up 60 points and the broad-based S&P 500 was up about 20 points.

Consumer spending – a key indicator of macro activity – rose slightly less-than-expected by 0.2%, compared with a revised 2% increase in the previous month.

Personal income rose 0.3%, slightly more than expected.

The Fed issued a quarter-point rate hike after its two-day monetary policy meeting earlier this month in a sign that central bankers are prioritizing cutting inflation over economic fears surrounding the failures of Silicon Valley Bank and Signature Bank of New York.

Powell said at the time the banking chaos could have a cooling effect on the economy and contribute to falling prices.

“Such a tightening of financial conditions would work in the same direction as a rate hike,” Powell said at his March 22 news conference. “You can think of it as the equivalent of a rate hike, or maybe more than that.”

The Fed will hold its next monetary policy meeting on May 2nd and 3rd.

The market is currently divided on whether to authorize another rate hike – with investors pricing in a 48.2% chance of rates being held and a 51.8% chance of one, according to CME Group’s FedWatch tool further increase by a quarter point.

“The pieces are now in place to bring inflation down quickly as the economy moves closer to recession,” said Jamie Cox, managing partner of Harris Financial Group.

“The focus will now be on when the Fed realizes it has gone too far, too fast and needs to change course,” Cox added.