Fed’s preferred inflation gauge shows no gain for March

The Federal Reserve’s preferred inflation gauge showed no change in March and remained well below the central bank’s target, a government report Monday showed. At the same time, consumer spending surge amid a jump in expenditures on motor vehicles and health care.

The core personal consumption expenditures, which strips out volatile food and energy prices, was flat for the month and up 1.6% year over year. The headline number rose 0.2% for a 1.5% increase over the year.

February’s results were largely the same.

The core and headline measures rose just 0.1% for the month, while the core was up 1.7% on the year and the headline rate increased 1.3%.

The PCE deflator is the Federal Reserve’s key inflation metric. The central bank considers 2 percent a healthy level for price stability but has failed to hit the target for most of the past decade or so.

Fed officials have said they expect to hold interest rates steady for the rest of the year, due in part to a low inflation rate.

Markets are assigning about a 65 percent chance of a rate cut by the end of the year, though individual Fed members have said they see little change of any loosening in policy ahead.

Deciding the future rate path got a little more complicated last week when a government reported showed that GDP grew by a much stronger than expected 3.2% in the first quarter.

Late this week, the policymaking Federal Open Market Committee holds its two-day meeting that will conclude Wednesday. Markets expect no change in rates, though Fed Chairman Jerome Powell’s news conference afterwards could provide future clues on monetary policy.

“Bottom line, if income growth, while rising at a good pace, is no longer accelerating, it is more imperative than ever in this cycle that inflation remains low. We need higher REAL wages and trying to stimulate higher inflation will do the exact opposite,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

While the price index fell, consumer spending surged to its highest level in 9½ years in March. Consumer spending rose 0.9% overall and 0.7% when adjusted for inflation. The consumer spending numbers are important as they suggest higher consumption numbers on the way for the second quarter.

The Commerce Department has been releasing two months of data at a time as it catches up from the government shutdown that ended Jan. 25.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell