Key US PCE inflation measure hits Fed's 2 percent annual target

The US inflation measure most closely watched by the Federal Reserve hit the two percent annual target for the first time in just over a year, the Commerce Department reported Monday. Although the index was flat in March compared to February, the two percent rise in the 12-month Personal Consumption Expenditures (PCE) price index is sure to feed concerns the Fed will have to raise interest rates at a more aggressive pace.
The Fed opens its two-day policy meeting on Tuesday but is widely expected to keep the benchmark lending rate unchanged this time. Still, with signs wages are finally starting to rise, and pressure on prices, there is growing expectation the central bank could raise rates three more times this year, a prospect that has hit stock prices in recent weeks.
Even so, Wall Street opened higher Monday following strong earnings and major merger announcements, which overshadowed the inflation news. Excluding more volatile food and energy components, the PCE price index rose 0.2 in the month and 1.9 percent compared to March 2017. The so-called core 12-month index has remained below the Fed's two-percent target for nearly six years.
Central bankers scrutinize inflation measures to gauge when and how fast to raise rates in an effort to contain price increase. In recent years, the problem they faced was stubbornly low inflation, so an uptick is a welcome development.
And while analysts agree the Fed will not overreact to one month's worth of data, there are more factors building that are likely to push prices higher, including the stimulus from the huge tax cuts passed in December. "Inflation is at the Fed's target level and it is likely the 2% rate will remain in the rear view mirror for quite some time," economist Joel Naroff said in a research note.
The PCE index hit two percent in the first two months of last year as well, but RDQ Economics highlights the difference a year makes: unemployment is down to 4.1 percent compared to 4.7 percent in early 2017 and manufacturers are reporting higher input costs.
The Fed has raised the overnight lending rate six times since December 2015, with the last move in March. It was on track to hike three times this year and three next, but more economists believe that pace will have to pick up.
Naroff cautioned, "if you are still holding onto the belief that the Fed will move only three times this year, you might want to reconsider that stance."
Within the PCE inflation measures, food prices rose 0.2 percent compared to February, while energy prices dropped 2.8 percent, according to the report.
Meanwhile, personal income rose 0.3 percent or $47.8 billion in the month, while spending rose 0.4 percent or $50 billion, with spending on vehicles, electricity and gas cited as the major contributors to the increase, the Commerce Department said.
Wages and salaries increased 0.2 percent in March, slowing sharply after four months of gains at more than double that rate. As reported in the GDP data Friday, personal income increased 4.4 percent in the first three months of the year, including a 5.6 percent jump in salaries. Spending increased 1.1 percent in the first quarter after a four percent jump in the final three months of 2017.