The Economy

Fed’s Key Inflation Gauge Hits 1.6% in February

The core PCE price index posted its biggest gain since April 2017 and appears to be on track to meet the Fed's 2% target.
Matthew HellerMarch 29, 2018
Fed’s Key Inflation Gauge Hits 1.6% in February

The U.S. Federal Reserve’s preferred inflation measure hit its highest level in almost a year in February, signaling economic growth remains solid despite a slowdown in consumer spending.

The Commerce Department reported Thursday that the core personal consumption expenditures price index rose 0.2% on the month and 1.6% from a year ago. It was the largest increase since April 2017.

Core PCE is still below the Fed’s 2% target, but the three-month annualized rate of gain is 2.8%. Michael Feroli, an economist at JPMorgan Chase, told The Financial Times that he expects year-on-year figures to continue to push higher in the coming months, taking inflation close to the Fed’s goal.

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“Core inflation has not exceeded 2 percent since April 2012, complicating the picture for a central bank that has been gradually reducing its stimulus programs,” the FT said. “This year the Fed has been putting less weight on sluggish inflation numbers as the buoyant labor market bolsters confidence that it is on track to hit its target.”

Including food and energy prices, the PCE price index rose 0.2% in February and 1.8% from a year ago, compared to expectations of 0.2% and 1.7% increases.

If core PCE inflation “remains well below the Fed’s 2% inflation target, the U.S. central bank probably won’t hike its key interest rate four times this year,” Investor’s Business Daily said, noting that at last week’s Fed meeting, policymakers saw core inflation rising to 1.9% this year as the Fed hikes three times.

“The Fed still believes in the Phillips curve, which predicts rising wage growth as unemployment falls,” the publication added. “Before too long, wage pressures put upward pressure on consumer prices.”

According to the Commerce Department, incomes rose 0.4% in February for the third straight month, continuing an acceleration that began last summer. Consumer spending advanced 0.2% as Americans tightened their purse strings after a busy holiday season that drove spending in the fourth quarter to the highest level in three years.

The rise in inflation last month was driven in part by higher healthcare prices, a component that accounts for 10.4% of the PCE index.