Fed’s preferred inflation gauge shows price pressures stayed elevated last month

WASHINGTON — A measure of inflation that the Federal Reserve closely monitors remained uncomfortably high in March, likely reinforcing the Fed’s reluctance to cut rates anytime soon and underscoring the burden on President Joe Biden’s re-election bid.

Friday’s report from the government showed prices rose 0.3% from February to March, the same as in the previous month. It was the third month in a row that the index performed faster than consistent with the Fed’s 2% inflation target. Compared to a year earlier, prices rose 2.7% in March, compared to an annual increase of 2.5% in February.

After peaking at 7.1% in 2022, the Fed’s favorite inflation index cooled steadily through most of 2023. Still, the index has remained above the central bank’s target rate so far this year. More expensive gasoline and higher prices for items including restaurant meals, health care, auto repairs and insurance have kept the overall pace of price increases high. As new car prices have risen sharply in recent years, car repair and replacement costs have risen particularly quickly.

Friday’s inflation data showed that, excluding volatile food and energy costs, core prices rose an elevated 0.3% from February to March, unchanged from the previous month. Compared to a year earlier, core prices rose by 2.8% for the second month in a row. The Fed closely monitors core prices, which often provide a particularly good picture of where inflation is headed.

Chronically elevated inflation rates have become a source of frustration for the Fed, whose policymakers last month predicted they expected to cut rates three times this year. Most economists expected the cuts to start in June. More recently, however, several Fed officials, including Chairman Jerome Powell, have indicated they have no immediate plans to cut their policy rate, a move that would ultimately lead to lower rates on mortgages, auto loans, credit cards and many business loans.

“Recent data clearly has not increased our confidence” that inflation will come fully under control, Powell said last week, and “instead indicates that it will likely take longer than expected to achieve that confidence.”

“If higher inflation continues,” he added, “we can maintain current interest rate levels for as long as necessary.”

Many economists say they think the Fed will cut its policy rate only once or twice this year, perhaps starting in September. Others say they don’t think the central bank will cut its policy rate at all in 2024.

Despite persistent inflationary pressures, robust job and average wage growth have allowed many U.S. consumers to continue spending at healthy levels, supporting a still-sustainable economy. That helps explain why Fed officials have said they can afford to keep interest rates at current levels. The economy slowed in the first three months of the year, the government said Thursday, but consumers continued to drive growth with their steady spending.

Starting in March 2022, the Fed raised rates eleven times to tackle the worst wave of inflation in four decades. Those rate hikes helped cool inflation dramatically – until the decline came to a halt early this year.

Still high price levels pose a challenge for the Biden administration, which has tried to take credit for the decline in inflation. The White House points to an unemployment rate that has remained below 4% for more than two years, the longest stretch since the 1960s.

But prices for food, rent, gas and other necessities are still about 20% to 30% higher than they were four years ago, which has negatively affected the economies of many Americans. Although average wages have also risen since then, many Americans believe they have earned their higher wages, but higher prices have undermined those gains.

The Fed tends to favor the inflation gauge the government released Friday — the personal consumption expenditures price index — over the better-known consumer price index. The PCE index attempts to account for changes in the way people shop when inflation rises. For example, it can identify when consumers switch from more expensive national brands to cheaper store brands.

In general, the PCE index tends to exhibit a lower inflation rate than the CPI. In part, that’s because rents, which have been high, have twice as much weight in the CPI as in the index released Friday.