Fed’s Preferred Inflation Gauge Rises, Fueled by Higher Energy Costs

A man pumps gas into a vehicle at a petrol station in Alhambra, Calif., on Oct. 2, 2023. Frederic J. Brown/AFP via Getty Images

The Federal Reserve’s preferred inflation measurement has risen, leading to broader concerns that progress in the fight against inflation has stalled or that another wave of price pressures could happen.

In February, the personal consumption expenditures (PCE) price index rose to 2.5 percent, up from 2.4 percent in January, according to the Bureau of Economic Analysis (BEA). This was in line with market expectations. On a monthly basis, the PCE jumped by 0.3 percent, down from an upwardly revised 0.4 percent.

Rising energy costs lifted the headline reading, climbing by 2.3 percent.

Oil prices have been on a tear this year, rising by nearly 17 percent in the first three months of 2024. This has resulted in higher gasoline prices, surging by 16 percent year to date.

Data within the PCE report reveal that food prices were little changed, edging up by 0.1 percent.

Core PCE, which omits the volatile food and energy components, dipped to 2.8 percent and matched the consensus estimate. This was down from an upwardly adjusted 2.9 percent. Core PCE also edged up by 0.3 percent monthly.

Overall, goods inflation increased by 0.5 percent, while services inflation climbed by 0.3 percent.

Monetary policymakers apply more weight to PCE because it is updated frequently and consists of consumer substitution effects. The consumer price index (CPI), for example, is adjusted biannually and maintains a narrower definition of consumer expenditures.

Jason Furman, head of the Council of Economic Advisers during the Obama administration, alluded to a concerning trend of the annualized core PCE coming in well above the Fed’s target for the third time in the past nine months.

On a one- and three-month annualized basis, core PCE was 3.2 percent and 3.5 percent, respectively.

The six-month annualized rate was 2.9 percent. By comparison, it came in at 1.9 percent in December 2023 and 2.6 percent in January.

Looking ahead to the next report, the Federal Reserve Bank of Cleveland’s Inflation Nowcasting model estimates that the PCE will rise to 2.6 percent in April. Core PCE is anticipated to slip to 2.7 percent.

Spending Balloons, Income Growth Stalls

In February, personal income rose at a smaller-than-expected 0.3 percent, down from 1 percent in January, new BEA data show.

Consumer spending surged by 0.8 percent, up from 0.2 percent. This exceeded the consensus estimate of 0.5 percent.

The personal saving rate clocked in at 3.6 percent, down from 4.1 percent in January.

Market Reaction

Most of the U.S. financial markets were closed for the Good Friday holiday.

The foreign exchange markets were open, and the U.S. dollar did not have much of a reaction.

The U.S. dollar index, a measurement of the buck against a basket of currencies, dropped below 104.50. The greenback has been one of the top-performing currencies this year, rising by more than 3 percent year to date.

The latest print highlights a “slow-moving” final mile in the inflation battle, according to Giuseppe Sette, president of financial research firm Toggle AI.

“This showcases progress on inflation is slow-moving and provides one more bullet in the bandolier of those who are calling the bluff on the Fed’s next rate cut. As a reminder, the Fed keeps rates consistently higher than inflation, except when they foresee a slowdown,” he said in a note.

Other market observers are not convinced that the inflation dragon has been slain.

“Not only was Jan’s inflation reading from the PCE price index revised upward this morning, but Feb’s print marks an acceleration on top of that; the dragon is not slain—he’s coming back for more,” E.J. Antoni, a Heritage Foundation economist, wrote on X, formerly known as Twitter.

Vance Ginn, a former White House economist, wrote on X that inflation continues to be too high and still hurts families.

“Good to see inflation moderating but remains too high as families are getting crushed under Bidenomics as real average weekly earnings remain down 1.5% adjusted for PCE inflation or down 4.2% adjusted for CPI inflation since January 2021,” he said.

Inflation Trending in Wrong Direction

In the first quarter of 2024, inflation has been trending in the wrong direction.

The CPI came in hotter than expected for two straight months. The annual inflation rose to 3.2 percent in February.

Wholesale prices also topped expectations in February. The producer price index (PPI), which measures how much businesses pay for goods and services, accelerated by 0.6 percent monthly, higher than the market estimate of 0.3 percent.

Economists pay close attention to the PPI because it is early in the supply chain and is typically a precursor for consumer prices.

Whether this will influence the Fed’s policy decisions remains to be seen.

Speaking to reporters following March’s policy meeting of the Federal Open Market Committee (FOMC), Fed Chair Jerome Powell noted that the unexpected inflation data might be a result of seasonal adjustments or something greater.

“We tend to see a little bit stronger inflation in the first half of the year, a little bit less strong later in the year,” Mr. Powell said at the post-FOMC meeting press conference on March 20. “We’re going to let the data show. I don’t think we really know whether this is a bump on the road or something more. We'll have to find out.”

Despite the concerning inflation developments, the Fed still anticipates three rate cuts this year.

According to the Summary of Economic Projections, the FOMC expects the median policy rate will be 4.6 percent by the year’s end, meaning that officials will have pulled the trigger on three quarter-point rate cuts.

Investors are largely in agreement as the futures market is signaling three reductions starting at the June meeting.