Inflation remained stubbornly high last month, but it hasn’t stopped Americans from spending.
The Personal Consumption Expenditures price index — a closely watched inflation gauge favored by the Federal Reserve — accelerated to 2.7% for the year ended in March, according to data released Friday by the Commerce Department.
That rate was above economists’ expectations for a 2.6% gain and landed above February’s reading of 2.5%.
On a monthly basis, prices rose 0.3%, unchanged from the pace seen in February.
Prices for services — specifically housing, health care and transportation — are applying upward pressure to overall inflation, Commerce Department data shows.
“This wasn’t the data the doctor ordered for Fed officials looking for confidence that inflation was back on a downward path,” wrote Christopher Rupkey, chief economist at FwdBonds, in a note issued Friday.
While many economists prefer to measure the nation’s inflation levels using the monthly Consumer Price Index (which shows prices are up 3.5% annually through March), the Fed bases its 2% inflation target on the overall PCE index. In its evaluation of monetary policy, the Fed also is closely watching shifts in underlying inflation — seen best through the “core” PCE index that strips out volatile food and energy prices.
The core PCE index held steady in March on both a monthly and annual basis, 0.3% and 2.8%, respectively.
While both indexes are much lower than they were at their peaks (7.1% PCE inflation in June 2022, 5.6% for core in February 2022), they also remain stuck above the Fed’s 2% target. After 11 rate hikes in two years, the Fed has been on hold and eyeing potential rate cuts for this year.
The timing of those cuts got pushed back after a series of hot inflation reports to start 2024, economists and analysts say.
“Today’s PCE price index was only slightly higher than expected, but it still confirmed the sticky inflation trend and the idea that interest rates are going to remain higher for longer,” Chris Larkin, E*Trade’s managing director for trading and investing, said in a statement.
When stripping out energy and food prices (categories that tend to be quite volatile), the “core” PCE index held steady at 2.8%, staying at the lowest rate in three years.
Consumer spending remained strong, jumping 0.8% and equaling the blistering pace seen a month before. Economists were expecting consumers to pull back some and had forecasted an increase of 0.5%, according to FactSet estimates.
Taking inflation out of the equation, the economy-powering spending was still up 0.5%, according to the report. Inflation-adjusted disposable personal income grew 0.2%.
However, savings as a percentage of disposable income dipped to 3.2%.
This story is developing and will be updated.
