Fed Takes a Cautious Approach to Inflation Control as Core Prices Remain Stable

In March, inflation in the United States rebounded, as indicated by the PCE index, which is closely watched by the US central bank. The data was released just before the bank’s next meeting, which is expected to encourage caution before any rate reductions. Inflation accelerated to 2.7% year-on-year in March, up from 2.5% in February, according to the Commerce Department. Analysts had predicted a more modest figure of 2.6%. However, monthly inflation remained stable at 0.3%.

Core inflation, which excludes volatile food and energy prices, also remained stable at 0.3% on a quarterly basis and 2.8% on a trend basis, higher than estimates. Household incomes saw stronger growth in March compared to February, increasing by 0.5% versus 0.3%. However, spending remained unchanged with a monthly increase of 0.8%. These data suggest that the economy is continuing to expand and inflation remains high.

The PCE inflation index is the indicator that the Federal Reserve aims to bring down to 2%. This rebound in inflation should encourage the Fed to be patient and maintain current interest rates at 5.25-5.50% for longer to avoid further price increases. The Fed’s efforts to reduce inflation are evident in the slowing economic growth in the first quarter, with GDP falling to its lowest level in almost two years.

The Fed’s chair, Jerome Powell, has warned that it may take longer than expected to achieve sustainable inflation levels