Consumer prices continue to increase

March PCE index singles inflation is not in check

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 (PCE) index.

On a monthly basis, prices increased 0.3%, in line with the advance the prior month, the PCE index shows.

What is the current core PCE inflation rate?

A measure of “core” prices that excludes volatile food and energy items and that the Fed follows more 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 to 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 this month, the consumer price index, revealed largerthan-expected gains in March. Overall inflation jumped to 3.5% from 3.2% and the core reading stayed high at 3.8%.

Economists were hoping the PCE figures would provide some solace because they’ve been running well below CPI. And rent, which has been leaping steadily, has half the weight in the PCE index that it holds in CPI. The Fed also tends to watch PCE more closely.

What’s the market doing today?

Despite the high annual inflation readings, investors largely took Friday’s report in stride. That’s because the 0.3% monthly gain in overall and core prices was largely in line with expectations, says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. It’s also down from the increase in January.

In early trading, the Dow Jones Industrial Average rose 86 points to 38.171 and the S&P 500 index was up 0.8%.

Is inflation expected to go down?

The price of goods such as used cars, furniture and appliances generally have fallen as pandemic-related supply chain snarls have 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 COVID-19-induced labor shortages.

Last month, goods prices ticked up just 0.1% as the cost of vehicles and parts tumbled 0.6%. But the cost of services jumped 0.6%. Transportation surged 1.6% and financial services and insurance increased 0.5%.

Is the Fed going to lower interest rates in 2024?

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. Futures market that had anticipated the first decrease of the Fed’s key interest rate in June and a total of three cuts this year now expect just one in September.