The core inflation rate most closely watched by the Federal Reserve eased further in November, though a touch less than expected. Yet Fed chief Jerome Powell has recently put the focus on a new “most important” inflation rate to make the case for continued rate hikes: PCE services less housing, which slipped to 4.3% last month. The S&P 500 rose slightly, reversing early losses following the personal consumption expenditures report.

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The PCE (personal consumption expenditures) price index rose 0.1% on the month. The PCE inflation rate continued to ease from June’s 40-year high of 7%, slipping to 5.5%. Core prices, minus food and energy, rose 0.2% on the month as the annual core inflation rate eased to 4.7%.

Wall Street had expected a 0.2% increase in the PCE price index and a 0.2%, with an overall 5.5% inflation rate and 4.6% core rate.

Powell Shifts Goalposts With New Key Inflation Rate

Powell’s favorite new inflation rate happens to be the most problematic one for the S&P 500. The gauge factors out goods inflation, which is rapidly falling. It also excludes housing inflation, which appears set to fall in 2023 as government data catches up to the stalling growth of market rents.

That leaves only core services other than housing, such as health care, education, hospitality and haircuts. Because price changes for such services are closely linked to wage growth, they provide the best signal of where core inflation is heading, Powell said.

The focus on this statistic is so new that it isn’t provided in Commerce Department’s report or a subject of Wall Street estimates. IBD calculations show that the price index for PCE services minus housing and energy rose 0.3% on the month and 4.3% from a year ago, down from October’s upwardly revised 4.7% annual increase.

The tamer monthly inflation reading for PCE services minus housing and energy came as transportation services prices fell 2.1% from October, but remained 11.8% above year-ago levels. Health care services inflation eased to a 0.2% monthly gain.

The Fed’s new key inflation rate isn’t great for the S&P 500 because it puts the focus on the strongest part of the economy: the ultratight labor market. Until the job market cracks, wage growth is likely to remain stubbornly high, and the Fed may hike its benchmark interest rate higher and for longer than markets anticipate.

S&P 500, Treasury Yields React To PCE Inflation Rate

After the PCE inflation report, the S&P 500 edged up 0.%2in Friday morning’s stock market action. The Dow Jones industrial average rose 0.2%, while the Nasdaq composite lost 0.2%.

The S&P 500 and broader market have come under pressure since the Fed’s half-point rate hike and projections for further tightening to the 5%-5.25% range in 2023. Worries about the earnings outlook and China’s Covid blow-up are adding to concerns about Fed overtightening. Yet the bond market doesn’t appear to be buying Fed guidance. As of Friday morning, markets were pricing in a peak rate of 4.75%-5%.

Through Thursday’s close, the S&P 500 is off 20.3% from its record closing high on Jan. 4. While the S&P 500 remains 6.9% above its 52-week closing low, the index has fallen back below its 50-day an 200-day moving averages.

The 10-year Treasury yield rose 6 basis points to 3.75%.

Make sure to read IBD’s daily afternoon The Big Picture column to stay on top of underlying market trends and what they mean for your trading decisions.

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