Its all in the core!

Today's batch of economic releases, with higher than expected consumer income and spending, surprisingly strong construction spending and stronger than expected PCE core inflation (a key indicator for the Fed), all for the month of February suggests that the inflation conundrum is far from over. This follows a week in which we saw lower than expected durable goods orders, strong existing home sales but weaker than expected new home sales. Delving into the figures, it is notable that inflation adjusted spending on durable goods was actually negative, reflecting what seems to be the impact of the recent oil price hike on disposable income. The clearly inflationary nature of these latest figures is contributing to a growing dilemma facing the Fed regarding policy action for it leaves them with less room to counter the economic slowdown. The Fed is basically at crossroads at this stage of the cycle and has little else to do than to just keep a close watch on developments.