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The Fed’s Favorite Inflation Gauge Sent Mixed Signals in February

Fed wants to see clear evidence that inflation is under control before cutting interest rates

Main points

  • The Personal Consumption Spending measure of inflation remained stubborn in February. This confirms a trend that was shown earlier in the month in another inflation measure.
  • In February, the PCE increased by 2.5% in the last 12 months, which is an acceleration of the annual inflation rate of 2.4% that was recorded in January. This increase is mainly due to the rising price of energy.
  • The “core” rate of inflation, which excludes volatile food and energy prices, increased by 2.8% in the past year. This is a slight deceleration compared to a 2.9% rise in January, and it’s lowest level since March 2021.
  • Federal Reserve officials consider PCE to be a better gauge of inflation that the widely reported CPI. Fed officials may have ignored recent high inflation rates, but more disappointing data might prompt them to postpone interest rate cuts.

The inflation rate remained stubbornly high during February. However, new data shows mixed signals as to whether the rate will rise or fall in the future.

The Bureau of Economic Analysis reported Friday that consumer prices as measured by Personal Consumer Expenditures rose 2.5% in the last 12 months, up from 2.4% inflation in January. This was primarily due to rising energy costs.

Inflation “core”, which excludes volatile food and energy prices, has risen 2.8% in the past year. This is a slight deceleration compared to a 2.9% rise in January, and it’s lowest level since March 2021.

According to a survey by Dow Jones Newswires, and the Wall Street Journal, both measures were in line forecasters’ expectations.MarketWatch. “U.S. “U.S. Economic Calendar.”

The report confirmed the trend of another inflation measure released earlier in the month, the Consumer Price Index. Both reports showed that inflation had a disappointing rebound at the beginning of the year, after nearly two years of falling.

Also Read: US Economy News Today – Housing Market could be thawing as we enter the busy spring season

It is important to note that the PCE is closely monitored by Federal Reserve officials who determine the central bank’s policy in order to combat inflation. could be prompted by higher inflation to raise the fed funds rate and interest rates for all types of loans.

The Fed has set a goal of 2% inflation per year. Despite this increase, the inflation rate is still not at that level.

Core inflation increased by 0.3% from January to February, which is a slight decrease from the 0.5% increase that was revised upwards the month prior. Core inflation is closely monitored by the Fed because it’s believed to be a better indicator of inflation direction since it does not include fuel and food costs, which can fluctuate due to reasons unrelated to broader inflation trends such as weather.
Financial market participants are wondering if Fed plans to reduce interest rates this year will be implemented due to the stubborn inflation that has been seen at the start of the year. According to the economic projections of the Fed’s policy committee, the latest meeting held earlier this month, the data from the past, including the surprising high inflation rate in the February CPI report, did not change the Fed’s plans.

Fed officials said that their decisions will be guided based on data. While the data from February showing stubborn inflation may not prompt them to reduce interest rates anytime soon, they aren’t so bad as to stop them from cutting them at some point in this year, if inflation returns to its previous downward trend.

Michael Pearce wrote in a comment that the Fed is likely to delay the first rate reduction from May to June, given the strong economic backdrop and the inflationary situation.

Update, March 29, 2024— After publication, this article was updated to include a comment from an economist as well as additional discussion on the report’s possible implications for Federal Reserve interest rate policy.

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