US inflation rate rises to 6.6%, PCE index shows, but prices could also be peaking

The numbers: The Fed’s preferred measure of inflation rose a hefty 0.9% in March, but the increase was largely due to a rise in the cost of gasoline and there were some signs that intense price pressures could be starting to decrease.

Over the past 12 months, the personal consumption price index has risen 6.6%, up from 6.4% in February, the government said on Friday. That is the steepest increase since 1981.

However, a narrower measure of inflation that omits volatile food and energy costs, known as core PCE, rose just 0.3% in March for the second month in a row. That matched Wall Street’s forecast.

The increases in the core inflation rate in February and March were the smallest consecutive readings since last summer.

In addition, the core inflation rate in the last year fell from 5.3% to 5.2%, marking the first monthly drop in more than a year.

The Fed considers the PCE index, in particular the core rate, to be the most accurate measure of US inflation. It is more comprehensive and takes into account when consumers substitute cheaper products for more expensive ones, for example, meat ground for filet mignon or frozen spinach for fresh.

Big picture: The highest inflation since the early 1980s is putting more financial pressure on households and businesses. Even if the rate of inflation, excluding gasoline and food, has slowed, it offers little comfort to Americans who have to pay more to fill up the tank and put dinner on the table.

The Fed is moving to raise interest rates quickly to try to cool inflation, but economists say it will take time.

Prices have soared in part due to ongoing pandemic-related shortages of key supplies such as computer chips. The Fed’s easy money strategy and massive government stimulus spending after the viral outbreak also contributed. Now all that stimulation is gone or gone.

However, rising inflation is prompting workers to demand higher wages and businesses to charge higher prices, which could make it harder for the Federal Reserve to reverse the trend.

Looking to the future: “The biggest story in the data released today was further evidence that inflation is starting to slow,” said US economist Andrew Hunter of Capital Economics.

“That won’t stop the Fed from rising 50 basis points next week, but it does support our view that inflation will fall a bit faster this year than Fed officials now seem to expect,” he added.

Market reaction: The Dow Jones Industrial Average DJIA,
-2.77%
and S&P 500 SPX,
-3.63%
they were set to open lower in Friday trading.

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