Inflation Rises to Four-Decade High, According to the Fed’s Preferred Measure

The so-called core PCE index—which excludes volatile food and energy prices—increased 5.2% in March from a year earlier, down from a revised 5.3% in the year through February.

On a monthly basis, core prices rose a seasonally adjusted 0.3% in March from the prior month, the same as the revised 0.3% increase in February. That was down from the 0.5% monthly pace in each of the prior four months—a mild slowdown that hinted broad price pressures might be starting to ease.

Fed Chairman Jerome Powell said at his news conference on March 16 that central bank officials were closely watching monthly changes in inflation for signs of whether price pressures have ebbed recently. The central bank, which seeks average inflation of 2%, began raising interest rates in March to cool the economy and has signaled more increases are on the way.

Friday’s numbers are unlikely to alter those plans, said Veronica Clark, an economist at Citigroup. “With core PCE inflation rising at around a 5% pace for each of the last four quarters, we would not expect a change in the near-term outlook for Fed policy,” she said.

The U.S. economy shrank in the first quarter at a 1.4% annual rate, due largely to a widening trade deficit and a slower pace of inventory buildup. However, consumer spending picked up, rising at a 2.7% annualized pace in the first quarter, up slightly from the previous quarter.

Strong consumer demand continues to outstrip supply, putting upward pressure on prices. Another widely followed inflation gauge, the Labor Department’s consumer-price index, rose 8.5% in March from a year earlier, a four-decade high. Producer prices leapt 11.2% on a 12-month basis in March, the fourth consecutive month with a double-digit gain, the department reported.

The CPI usually runs hotter than the PCE index due to differences in the pools of spending each captures. The CPI measures changes in living costs based on what urban consumers spend out of pocket for a hypothetical basket of goods and services. The PCE index, by contrast, includes prices in rural areas and those paid by organizations on behalf of households—for example, employer-sponsored healthcare plans.

Both indexes showed that energy prices soared in March, following Russia’s invasion of Ukraine in late February. The PCE index for energy jumped 33.9% in March from a year earlier. Food prices climbed sharply as well, up 9.2% last month, an acceleration from the 8% 12-month rise in February, the Commerce Department reported.

The monthly figures hint that core inflation could be on track to come down markedly by midsummer, said Omair Sharif, founder of Inflation Insights LLC. “The bigger story is that if we can maintain the slower pace through the second quarter, then we’ll see a big drop in the annual rate from around 5.3% in March to around 4.2% or 4.3% by June,” he said. That would be near the Fed’s projection that core inflation will fall to 4.1% in the fourth quarter of this year.

Write to Gwynn Guilford at [email protected]