A new reading on the Federal Reserve’s favored inflation gauge shows energy prices boosted overall inflation, while inflation excluding energy price increases also rose, locking in the central bank’s stance holding interest rates steady.
The Personal Consumption Expenditures Index rose 3.5% in March on a headline basis, in line with expectations. That’s up from 2.8% in February before the war. On a “core” basis, which excludes volatile energy and food prices, inflation rose 3.2%, also in line with expectations, and up from 3% in February.
The reading shows that inflation was already sticky — rising from the month prior — and is now over a full percentage point above the Fed’s 2% target.
With warming inflation in the background, Wednesday’s policy meeting revealed deep division within the Fed over its current “easing bias.” Three voting members objected to including language in the policy statement that continues to telegraph that the central bank is eventually looking to cut rates again.
Outgoing chair Jerome Powell cautioned that the risk is “real” for headline inflation, which has been driven up by higher gas prices, to bleed through to core inflation, but that, with interest rates mildly restricting the economy, the central bank can wait and see before it acts. He noted that if the Iran war goes on much longer, the higher gas prices that are hurting consumers now will start to be reflected in other prices.
He also said that with inflation running above 2% for several years and the Fed already looking through the impact of tariffs, officials will be “very cautious” about looking through the surge in energy prices.
Though part of the story of inflation is also higher tariffs, which the central bank expected, and Powell said those effects would start filtering out over the next two quarters.
He underscored that officials believe rates are in a “good place” now and that if they feel they need to hike or cut they will signal that.
Jennifer Schonberger is a veteran financial journalist covering the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.
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