Weekly Economic Snapshot: Inflation Concerns Cast Shadow of Uncertainty

Inflation, as measured by the Federal Reserve’s preferred metric, showed signs of cooling last month, though it remains stubbornly above target. The Core Personal Consumption Expenditures (PCE) Price Index, which excludes volatile food and energy costs, rose 2.6% year-over-year in January, aligning with expectations. This represents a decrease from December’s 2.9% and is the lowest annual rate since June. On a monthly basis, core prices increased by 0.3%, also meeting forecasts. Meanwhile, the headline PCE Price Index saw a 2.5% annual increase, down from 2.6% in December, marking the first monthly deceleration in four months. Monthly, the headline index also rose by 0.3%, as predicted.

Despite these figures meeting projections, inflation continues to exceed the Fed’s 2% target, raising concerns that progress in curbing price increases has plateaued. The central bank has maintained a cautious approach regarding interest rate cuts. They will analyze the upcoming February employment and Consumer Price Index (CPI) reports before their next policy meeting in mid-March.

U.S. consumer confidence experienced a sharp decline in February, as the Conference Board Consumer Confidence Index decreased for the third consecutive month. The index dropped 7.0 points to 98.3 this month from January, falling short of the expected 102.7 reading. This represents the steepest one-month decrease since August 2021 and puts the index at its lowest point in eight months. With that said, the index is still sitting within its 10-point range it has hovered in for the past 3.5 years, albeit at the lower boundary.

The index, based on a monthly survey of consumer attitudes toward current and future economic conditions, showed deterioration in four of the five components in February. The Future Expectations index saw the sharpest drop, with consumers becoming more pessimistic about future business conditions, future income, and future employment opportunities. For the Present Situation Index, current views of business conditions improved slightly while views of current labor market conditions weakened. Furthermore, 12-month inflation expectations surged to 6% in February, as inflation and prices continued to dominate write-in responses, along with new mentions of tariffs and comments on the current Administration and its policies.

The Consumer Discretionary Select Sector SPDR ETF (XLY A) is tied to consumer confidence.

The U.S. economy marked its 11th consecutive quarter of expansion, ending 2024 on a positive note. According to the second estimate, real GDP inflation-adjusted measure of all goods and services produced in the U.S—expanded at an annual rate of 2.3% in Q4. Although this reflects a slowdown from Q3’s 3.1% growth, it aligns with expectations and the previous month’s advance estimate. This month’s report was based on more complete source data than last month’s advance estimate but will be subject to revisions again before next month’s final report.

In Q4, three of the four components made positive contributions to real GDP. Consumer spending continued to be the primary driver behind last quarter’s expansion but could face headwinds in the near future as consumer confidence has worsened at the start of 2025 due to ongoing inflation concerns. Government spending also helped drive growth at the end of 2024, while a decline in business investment partially offset these gains. Lastly, net exports made minor positive contributions to round out the year.

The S&P CoreLogic Case-Shiller Home Price Indices, widely considered benchmarks for U.S. housing prices, continued their upward trajectory in December. The National Home Price Index marked its 23rd consecutive monthly increase and 19th straight record high, rising 0.5% from November and 4% year-over-year. This was the largest monthly gain since February. Similarly, the 20-city and 10-city indexes both reached new all-time highs, with the 20-city index rising 0.5% from November and 4.5% annually, and the 10-city index also up 0.5% month-over-month and 5.1% year-over-year.

The S&P 500 finished below 6000 last week for the first time in over six weeks, posting a 1.0% loss from the previous Friday. As a result, the SPDR S&P 500 ETF Trust (SPY A) fell 1.0% last week. Meanwhile, the S&P Equal Weight Index rose 0.2% from the previous week and the Invesco S&P 500 Equal Weight ETF (RSP A-) was up 0.2%.

The 10-year Treasury yield finished the week at 4.24%, its lowest level since early December. Meanwhile, the 2-year note finished at 3.99%, its lowest level since mid-October.

Market expectations for rate cuts in 2025 have increased from one to three in the past week, according to the CME FedWatch Tool. The anticipated cuts are now expected at the June, September, and December meetings.

This week’s economic focus is on the labor market. The ADP report on February’s private payroll data will be released on Wednesday, followed by the BLS’s comprehensive employment report on Friday. Furthermore, S&P Global and the Institute for Supply Management will release February’s Manufacturing and Services PMI readings, providing insight into the economic activity of both sectors.

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