The Fed's favourite inflation gauge just rose at the slowest pace in more than a year

  • A key measure of price pressures cooled in February and March, the Commerce Department said Monday.
  • Inflation has remained below the Federal Reserve’s target.
  • Meanwhile, Monday’s report also showed consumer spending accelerated significantly in recent months.

The Federal Reserve’s favourite measure of inflation rose at the slowest pace in more than a year while consumer spending picked up.

The Commerce Department said Monday that the price index for personal consumption expenditures, excluding volatile categories like food and energy, was unchanged in March after edging 0.1% higher in the previous month. That marked the slowest year-over-year increase since the beginning of 2018.

The Fed will likely take notice of the results but the softer readings appear to be mostly month-to-month noise, said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. Officials have signalled the central bank would hold rates steady this year, but penciled in one increase in 2020.

“If the Fed hikes this year, it will be because of accelerating wages, not the inflation rate at the time,” Shepherdson said.

Even after the economy expanded far faster than expected in the first quarter, inflation has remained below the Fed’s inflation target of 2%. Yet economists expect to see upward pressure on the index as wages accelerate. The unemployment rate has held near five-decade lows in recent months, coming in at 3.8% in March.

Higher energy prices could also boost headline inflation numbers in the coming months, according to analysts at Morgan Stanley’s wealth management global investment committee.

“Our analysis is that if current energy prices hold through the fourth quarter, headline CPI is at risk of breaching 3%,” they said in an email.

The report out Monday also showed consumer spending, which accounts for more than two-thirds of economic activity, jumped by the most in more than nine years. Personal consumption expenditures were up 0.1% in February and 0.9% in March.

The readings pointed to higher consumption in the second quarter. On Friday, the Commerce Department said consumer spending grew at the slowest pace in a year.

Monday’s report included data for both February and March because it had been delayed due to the five-week federal government shutdown at the beginning of the year.

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