An inflation measure that’s watched closely by the Federal Reserve eased further last month in a development that could keep the central bank on track to pause its aggressive interest rate hikes.
Yet an underlying measure of price increases dipped but remained stubbornly high.
Consumer prices increased 4.2% in March from a year earlier, slower than the 5.1% pace in February and the 40-year high of 7% in June thanks to lower food and energy prices, the Commerce Department said Friday. That’s the smallest annual gain since May 2021.
On a monthly basis, prices ticked up 0.1% following a 0.3% increase the prior month.
A measure of prices that strips out volatile food and energy items climbed 0.3%, in line with the rise the previous month. That nudged down the annual increase in so-called core prices to 4.6% from an upwardly revised 4.7% the previous month.
The increases are still well above the Fed’s 2% inflation target.
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Meanwhile, consumer spending on goods and services was flat following a 0.1% increase in February, Commerce said.
Personal income rose 0.3%, similar to the previous month.
What is the employment cost index?
Separately, wages and benefits increased by 1.2% in the first quarter, slightly faster than the 1.1% gain recorded in the last three months of 2022. Economists expected total compensation growth to hold steady.
The increase did lower the annual increase in pay and benefits to 4.8% from 5.1% late last year.
But private-sector pay climbed 1.2% and 5.1% annually, unchanged from the previous quarter.
The two reports show inflation and pay increases are slowing gradually but remain elevated and bolster the Fed’s plan to raise its key short-term interest rate by another quarter percentage point next week, economists said.
“Price inflation and wage growth are proving to be a little stickier than we originally hoped,” economist Paul Ashworth of Capital Economics wrote in a note to clients.
Pay increases in service industries dipped to 1.1% from 1.2% the prior quarter. Fed Chair Jerome Powell has said officials’ chief goal is to reduce wage growth in service industries such as health and travel, which are contributing significantly to core inflation as employers pass higher labor costs to consumers through rising prices.
Kathy Bostjancic, chief economist of Nationwide Mutual, expects the Fed to pause its aggressive rate hike campaign after next week’s quarter-point move.
How much did the U.S. economy grow last quarter?
In its report on overall economic growth Thursday, the Department of Commerce said consumption grew at a healthy 3.7% annual rate during the first three months of the year. But economists have noted that spending was juiced by mild winter weather in January and has lost steam recently. Many low- and middle-income households have depleted their pandemic-related stimulus checks and other savings even as high interest rates have made borrowing more expensive.
Earlier this month, Commerce said retail sales, which includes outlays for goods but not services, fell 1% in March, more than expected.
The Fed has raised its key interest rate by nearly 5 percentage points over the past year to cool inflation. Earlier this month, the Labor Department said another inflation gauge, the consumer price index, declined to 5% in March from 6% the previous month but core CPI leaped by more than expected.
Traditionally, the Fed has relied more heavily on the PCE inflation measure, particularly the core reading, to guide its interest rate decisions.
Will the Fed raise rates in May 2023?
Fed officials have indicated they plan to hoist their benchmark rate by another quarter point next week to a range of 5% to 5.25% — then pause as they assess the effects of the rapid increases on the economy and prices. That would be sooner than officials expected early this year. Most economists believe the Fed’s sharp rate hikes, along with last month’s banking crisis, will tip the economy into a recession this year.
Powell has said the collapse of Silicon Valley Bank and Signature Bank will likely prompt banks to restrict lending, weakening the economy and inflation, and allowing the central bank to halt its rate increases earlier than planned. But that blueprint hinges on how quickly inflation comes down in coming months.
