Key US inflation measure hits Fed’s 2 per cent annual target

WASHINGTON: The US inflation measure most closely watched by the Federal Reserve hit the two per cent annual target for the first time in just over a year, the Commerce Department reported.

Although the index was flat in March compared to February, the two per cent rise in the 12-month Personal Consumption Expenditures (PCE) price index is sure to feed concerns the Fed will have to raise interest rates at a more aggressive pace.

The Fed opens its two-day policy meeting on Tuesday but is widely expected to keep the benchmark lending rate unchanged this time.

Still, with signs wages are finally starting to rise, and pressure on prices, there is growing expectation the central bank could raise rates three more times this year, a prospect that has hit stock prices in recent weeks.

Wall Street closed lower again Monday, but investors were focused on concerns about Iran and trade disputes, which overshadowed strong earnings and major merger announcements, pushing share prices higher early in the session.

Excluding more volatile food and energy components, the PCE price index rose 0.2 in the month and 1.9 per cent compared to March 2017.

The so-called core 12-month index has remained below the Fed’s two per cent target for nearly six years.

Central bankers scrutinise inflation measures to gauge when and how fast to raise rates in an effort to contain price increases.

In recent years, the problem they faced was stubbornly low inflation, so an uptick is a welcome development.

And while analysts agree the Fed will not overreact to one month’s worth of data, there are more factors building that are likely to push prices higher, including the stimulus from the huge tax cuts passed in December.

“Inflation is at the Fed’s target level and it is likely the two per cent rate will remain in the rear view mirror for quite some time,” economist Joel Naroff said in a research note.

The PCE index hit two per cent in the first two months of last year as well, but unemployment is down to 4.1 per cent compared to 4.7 per cent in early 2017 and manufacturers are reporting higher input costs, RDQ Economics noted.

The Fed has raised the overnight lending rate six times since December 2015, with the last move in March. It was on track to hike three times this year and three next year, but more economists say that pace will have to pick up.

“If you are still holding onto the belief that the Fed will move only three times this year, you might want to reconsider that stance,” Naroff cautioned.

Within the PCE inflation measures, food prices rose 0.2 per cent compared to February, while energy prices dropped 2.8 per cent, according to the report.

Personal income rose 0.3 per cent, or US$47.8 billion in the month, while spending rose 0.4 per cent or US$50 billion.

The Commerce Department cited spending on vehicles, electricity and gas as the major contributors to the increase.

Wages and salaries rose 0.2 per cent in March, slowing sharply after four months of gains at more than double that rate. — AFP