Flat Core PCE, Rising Spending: Is the Fed Done Hiking Rates This Cycle?

Core PCE Flat, Consumer Spending Accelerates While Pending Home Sales Rebound

U.S. economic data for March delivered a mixed signal to traders, with consumer spending showing strong growth even as inflation held steady and income gains moderated. The latest figures from the Bureau of Economic Analysis and the National Association of Realtors suggest consumption momentum is intact, while housing demand appears to be rebounding in key regions.

Consumer Spending Outpaces Income Growth

Personal consumption expenditures (PCE) rose 0.7% in March, outpacing the 0.5% increase in both personal income and disposable personal income. The data shows consumers are continuing to spend aggressively, particularly on services, which rose $79.9 billion. Goods spending also posted a solid $54.5 billion increase. Despite elevated spending, the personal saving rate declined to 3.9%, down from prior months, signaling increased reliance on income for consumption and less financial cushion.

Core Inflation Stable, Real Income Growth Holds

The PCE price index was flat for March, with core PCE (excluding food and energy) also unchanged on the month. On a year-over-year basis, headline PCE rose 2.3%, while core PCE ticked up 2.6%. This marks a pause in recent inflation pressures and aligns with the Federal Reserve’s recent tone of patience. Meanwhile, real disposable income also rose 0.5%, indicating that wage gains are managing to offset inflationary pressures for now. Compensation growth was led by private-sector services, contributing $46.4 billion, followed by goods-producing industries with $11.8 billion.

Pending Home Sales Rise Sharply in March

The housing sector showed renewed strength, with the Pending Home Sales Index climbing 6.1% month-over-month. Gains were concentrated in the South, while the Northeast experienced a decline. According to NAR Chief Economist Lawrence Yun, ongoing job growth and sensitivity to mortgage rate shifts are influencing contract signings. While not all pending sales lead to closings, the increase points to renewed buying interest as market conditions stabilize.

Market Forecast: Neutral to Bullish

The combination of stable core inflation and robust consumer spending supports a neutral-to-bullish short-term outlook for U.S. equity and bond markets. Inflation staying flat may relieve pressure on the Fed to hike rates, while rising consumption and housing activity suggest continued economic expansion. Traders should watch upcoming April CPI and labor data for confirmation of this trend.