Another setback for central banks as inflation remains stubborn and spending strong

The Fed may not be done after all

Investors may have underestimated the pace of disinflation this year if economic data this week is anything to go by, with US figures today further enforcing the view that price pressures are stubborn and spending healthy.

The headline PCE price index brought the biggest surprise, jumping 0.4% on the month against expectations of zero increase, but the core reading also brought an upside surprise, as did spending which jumped 0.8%, double the consensus view.

Suddenly the jobs report next week looks like the last hope for the Fed pausing its tightening cycle next month and if recent data is anything to go by, no one can be feeling particularly optimistic. The economy is showing incredible resilience and if it is turning a corner, it’s doing so painfully slowly. A soft landing is becoming harder to achieve and there’s an increasing risk that central banks will have to go much further and accept the economic consequences. ​

How sustainable is the recent trend in UK household spending?

The cost-of-living crisis in the UK is not having the dampening effect on household spending that many anticipated and today’s retail sales figures showed that once more. Bad weather depressed spending in March and by more than initially thought but it rebounded last month by 0.5%, maintaining the positive trend we’ve seen in recent months.

Resilience in household spending has been matched by an economy that has outperformed expectations and that positive feedback loop is probably encouraging consumers to keep going. The question now is how long that can last as higher interest rates continue to filter into the broader economy, and as markets price in much higher rates later this year as a result of better activity and higher inflation.

Bitcoin correction continues, albeit slowly

Bitcoin is relatively flat going into the weekend and coming under some pressure in recent days. The cryptocurrency had been in consolidation after breaking lower earlier this month but retested recent lows around $26,000 yesterday, a level it remains above currently. A move below here could see attention shift back to $25,000 around the February peak, although even this would only represent a modest correction of the 2023 rally.

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