U.S. monthly inflation rose moderately in March, but stubbornly higher housing and transportation costs suggested the Federal Reserve could keep interest rates elevated for a while.
The report from the Commerce Department on Friday, which also showed strong consumer spending last month, offered some relief to financial markets spooked by worries of stagflation after data on Thursday showed inflation surging and economic growth slowing in the first quarter.
"Markets should breathe a sigh of relief this morning," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "Given the elevated levels of inflation, and this is the new normal for 2024, the market is going to need to get over hopes for Fed rate cuts."
The personal consumption expenditures (PCE) price index increased 0.3% last month, matching the unrevised gain in February, the Commerce Department's Bureau of Economic Analysis said. In the 12 months through March, inflation rose 2.7% after advancing 2.5% in February. The increase in inflation last month was broadly in line with economists' expectations.
There had been fears that inflation could exceed forecasts in March after the release of the advance gross domestic product report for the first quarter on Thursday showed price pressures heated up by the most in a year, driven by surging costs for services, especially transportation, financial services and insurance. These more than offset a drop in the prices of goods.
Most of the spike in inflation occurred in January. The PCE price index is one of the inflation measures tracked by the U.S. central bank for its 2% target. Monthly inflation readings of 0.2% over time are necessary to bring inflation back to target.
Fed policymakers are expected to leave rates unchanged next week. The central bank has kept its benchmark overnight interest rate in the 5.25%-5.50% range since July, after raising it by 525 basis points since March 2022.
Financial markets initially expected the first rate cut to come in March. That expectation got pushed back to June and then September as data on the labor market and inflation continued to surprise on the upside.
Excluding the volatile food and energy components, the PCE price index increased 0.3% in March after rising by the same unrevised margin in February. Core inflation increased 2.8% on a year-on-year basis in March, matching February's advance.
PCE services inflation excluding energy and housing climbed 0.4% last month after a 0.2% gain in February. Policymakers are monitoring the so-called super core inflation to gauge their progress in fighting inflation.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased by a solid 0.8% last month, matching the rise in February. The data was included in the GDP report, which showed consumer spending moderating to a still-solid 2.5% pace in the first quarter from the brisk 3.3% pace in the October-December period.
The economy grew at a 1.6% rate last quarter, held back by an increase in the trade deficit. The wider trade gap reflected a surge in imports, a function of strong domestic demand.
When adjusted for inflation, consumer spending rose 0.5%. The so-called real consumer spending also increased 0.5% in February. The solid rise in March put consumer spending on a higher growth path heading into the second quarter, which bodes well for the economy.
