Figures: The Federal Reserve’s preferred inflation measure rose sharply by 0.9% in March, but the increase was largely due to a jump in gas prices and there were some signs that intense price pressures may begin to ease.
In the last 12 months, the personal consumption price index rose 6.6% from 6.4% in February, the government said on Friday. This is the sharpest increase since 1981.
Yet a narrower inflation measure that misses variable food and energy costs, known as the core PCE, rose just 0.3% in March for the second month in a row. That was in line with Wall Street’s forecast.
Increases in core inflation in February and March were the smallest consecutive readings since last summer.
Moreover, the core inflation rate last year fell to 5.2% from 5.3%, marking the first drop in a month from month to year.
The Fed sees the PCE index – in particular the key interest rate – as the most accurate measure of inflation in the United States. It is more comprehensive and takes into account when consumers replace cheaper goods with more expensive ones – say beef for mignon fillet or frozen spinach for fresh.
Overall picture: The highest inflation since the early 1980s has put more financial pressure on households and businesses. Even if the rate of inflation without gas and food slows down, it offers little comfort for Americans, who have to pay more to fill the tank and put dinner on the table.
The Fed is pushing for a quick rise in interest rates to try to cool inflation, but economists say it will take time.
Prices have risen in part due to the continuing pandemic shortage of key supplies such as computer chips. The Fed’s easy money strategy and the huge cost of government incentives after the virus outbreak also contributed. Now all this stimulus has disappeared or is disappearing.
Still, rising inflation is pushing workers to pay more and businesses to push for higher prices, potentially making it harder for the Fed to turn the tide.
Looking ahead: “The bigger story than today’s data was further evidence that inflation is starting to decline,” said US economist Andrew Hunter of Capital Economics.
“This will not stop the Fed from increasing by 50 basis points next week, but it supports our view that inflation will fall a little faster this year than Fed officials now seem to expect,” he added.
Market reaction: Dow Jones Industrial Average DJIA, -2.21% and S&P 500 SPX, -3.11% had to open lower in Friday’s deals.
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