The PCE index is the Fed’s favorite to track price increases, which it expects to drive to 2% in a year, for which it has repeatedly raised key interest rates.
Falling energy prices helped moderate US 12-month inflation sharply as measured in March, to 4.2% just days before the Federal Reserve’s (Fed) monetary policy meeting ).
The PCE data released by the Commerce Department compares to February’s 12-month 5.1% (adjusted slightly from the initial 5).
This index, the most followed by the Fed, the US central bank, also shows that in monthly measurement the rise in prices has moderated to 0.1%, in line with analysts’ expectations, according to the consensus published.
Core inflation, which excludes volatile food and energy prices, also fell although it now outpaces headline inflation, standing at 4.6% on a year-over-year basis, down from 4.7% the previous month.
Every month, core inflation was 0.3%, in line with expectations.
“Core inflation moderates modestly but remains well above the Fed’s target,” said HFE chief economist Rubeela Farooqi, who estimates last month’s results aren’t enough to keep the bank waiting. to raise interest rates again.
The PCE index is the Fed’s favorite to track rising prices, which it expects to drive to 2% in a year, for which it has repeatedly raised key interest rates as a way to make credit more expensive and therefore discouraging consumption and investment.
Services are still expensive
Until now, prices have been driven by external shocks and their effects on commodities, particularly oil, and food.
But that’s not the case anymore: Energy prices fell 10% in March and food was up 8% from February’s 10% measurement.
Inflation is therefore concentrated in services, which rose by 5.5%, even below the 5.8% recorded in February.
These are elements that should lead the Fed’s monetary committee, which meets next week, to raise the reference rates again, currently in the 4.75-5% range, compared to the 0-0.25% range by just over a year ago.
The market expects an increase of 0.25 percentage points.
“We believe next week’s rate hike will be the culmination of the tightening cycle. The Fed will likely need some time to assess the impact of the rapid tightening that has taken place over the past 18 months before deciding how it will continue,” said Luke Bartholomew, senior economist at investment firm abide.
inflation vs rates
With inflation now below policy rates, the Fed is entering new territory: a real tightening, with an impact that could be even greater on the economy.
Although the labor market remains strong with an unemployment rate of 3.5%, the increase in the cost of money is being felt.
In the first quarter, GDP recorded the smallest quarterly increase in annual projection since the post-pandemic recovery (+1.1%).
Most analysts expect a tougher end of the year for the US, with likely weak growth, or even a short recession, due to tougher credit conditions.
The Fed’s fear is that risk of “broad economy” inflation will materialize, one of its governors, Lisa Cook, warned on April 21, when she stressed that although the various measures of inflation “regress from their highs, they remain high, suggesting that inflation has become pervasive in the economy.”
“The big question is whether and how quickly inflation will continue its downward path towards our 2% target,” he added.
