Inflation increased in February as anticipated, potentially maintaining the Federal Reserve’s stance until it contemplates interest rate adjustments, as indicated by a key measure the central bank relies on.
The Commerce Department revealed on Friday that the personal consumption expenditures price index excluding food and energy surged by 2.8% over the past 12 months and rose by 0.3% from the previous month, in line with expectations from Dow Jones.
The headline PCE reading, which includes volatile food and energy prices, indicated a 0.3% uptick for the month and a 2.5% increase over the past 12 months, matching estimates closely.
Both the stock and bond markets remained closed on Good Friday.
Although the Fed considers both measures in its policy decisions, it views core inflation as a more accurate indicator of long-term inflationary pressures. With the Fed targeting 2% annual inflation, core PCE inflation has remained above this threshold for the past three years.
“Nothing really super surprising. Not the numbers the Fed wants to see, but I don’t think this is going to catch anybody off guard when they come back to work on Monday,” Victoria Greene, chief investment officer at G Squared Private Wealth, told CNBC.
“I think everybody is going to pivot to labor pretty quickly and say well maybe if we see some weakness and cracks over here, this little stickiness in inflation and PCE isn’t going to matter as much.”
Rising energy costs helped push up the headline reading, with a 2.3% increase. The food index edged up 0.1%. Inflation pressures came more from the goods side, which rose 0.5%, compared to the 0.3% increase for services.
That countered the trend over the past year, during which services rose 3.8% while goods fell by 0.2%.
Other upward pressure came from international travel services, air transportation, financial services, and insurance. On the goods side, the motor vehicles and parts category was the biggest contributor.
Along with the inflation increase, consumer spending shot up 0.8% on the month, well ahead of the 0.5% estimate, possibly indicating additional inflation pressures. Personal income increased 0.3%, slightly softer than the 0.4% estimate.
The statement follows shortly after the central bank decides to maintain its benchmark short-term borrowing rate, signaling that it remains unconvinced of sufficient progress on inflation to warrant a cut.
In their quarterly rate projections, members of the Federal Open Market Committee reiterated the expectation of three quarter-percentage point reductions this year and in 2025.
Market sentiment anticipates the Fed’s stance to persist in its upcoming May 1 announcement, with reductions likely to commence at the June 11-12 meeting.
Current market pricing aligns closely with the FOMC’s forecast for three cuts, as indicated by the CME Group’s FedWatch measure of futures market activity.
