US: Key inflation gauge stays high
Reading disappoints those awaiting rate cuts
A key inflation measure rose sharply in March, further dampening hopes that the Federal Reserve will soon cut interest rates. An underlying gauge of price increases stayed elevated, and household spending increased dramatically again, possibly keeping inflation higher for longer.
Consumer prices overall increased 2.7% from a year earlier, above February’s 2.5% rise but well below the 40year high of 7% in June 2022, according to the Commerce Department’s personal consumption expenditures index.
On a monthly basis, prices increased 0.3%, in line with the advance the prior month, the PCE index shows.
A measure of “core” prices that excludes volatile food and energy items and that the Fed follows closely increased 0.3% on a monthly basis, the same as in February. That kept the annual increase at 2.8%.
The disappointing readings were largely expected after the Commerce Department said in Thursday’s report on economic growth that core PCE inflation rose at an annual rate of 3.7% in the first quarter, more than the 3.4% forecasters projected. The big gain was mostly the result of an upward revision of January’s monthly increase to 0.5% from 0.45%, says economist Paul Ashworth of Capital Economics.
Just a few weeks ago, Fed Chair Jerome Powell said the central bank would not overreact to worrisome inflation numbers in January and February. He suggested they could have been blips and inflation still appeared headed toward the Fed’s 2% target.
His tone changed after another inflation measure out earlier this month, the consumer price index, revealed larger-than-expected gains in March. Overall inflation jumped to 3.5% from 3.2%, and the core reading stayed high at 3.8%.
The prices of goods such as used cars, furniture and appliances generally have fallen as pandemic supply chain snarls resolved. But the cost of services, including rent, car insurance and health care, have climbed higher, in part because of sharply rising wages tied to labor shortages.
Last month, goods prices ticked up just 0.1% as the cost of vehicles and parts tumbled 0.6%.
The cost of services jumped 0.6%. Transportation surged 1.6% and financial services and insurance increased 0.5%.
After the CPI report, Powell said “it’s likely to take longer than expected” for the Fed to gain confidence that inflation is heading sustainably to the Fed’s target.