US Fed's favoured inflation gauge ticks higher as fuel costs rise

WASHINGTON — The US central bank's favored measure of inflation edged higher last month on the back of rising fuel prices, according to government data published recently, but a metric stripping out volatile food and energy prices continued to ease.

The data suggest inflation is still broadly on the Federal Reserve's bumpy path towards its long-term target of two per cent, despite the recent uptick.

But the higher top-line figure will likely cause concern at President Joe Biden's reelection campaign, as the Democratic incumbent seeks to convince still-sceptical consumers that the economy is heading in the right direction ahead of November's vote.

The personal consumption expenditures (PCE) price index rose at an annual rate of 2.5 per cent in February, up 0.1 percentage points from a month earlier, the Department of Commerce said in a statement.

The figure is in line with the median forecasts in a survey of economists conducted by Dow Jones Newswires and The Wall Street Journal.

Goods prices rose 0.5 per cent last month, while the costs of services increased by 0.3 per cent.

Much of the February increase in the cost of goods came from energy prices, which rose 2.3 per cent from January.

On a monthly basis, PCE inflation eased slightly from January, rising by 0.3 per cent.

"The loosening of labor market conditions, stable inflation expectations, and likely disinflation in rents to come all make us confident that inflation will still trend slightly lower over the course of this year," Michael Pearce from Oxford Economics wrote in a note to clients.

"That should be enough to give the Fed confidence to begin removing some of the policy tightness later this year, though the resilience of the real economy means policymakers are in no rush," he added.

Recent data has led some Fed officials to question policymakers' recent prediction of three interest rate cuts this year, as the US central bank pivots from tightening to loosening monetary policy.

"In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data," Fed Governor Christopher Waller told a conference in New York on Wednesday.

Easing 'core' prices 

While the headline inflation rate rose last month, the closely watched "core inflation" measure, which strips out volatile food and energy costs, eased slightly, rising by 2.8 per cent on an annual basis, and by 0.3 per cent from January.

"The stickiness in the core and services inflation readings in February and January justifies Fed officials less dovish mood as of late," Nationwide chief economist Kathy Bostjancic wrote in an investor note.

"It supports our view that the Fed waits to at least June to start cutting rates, with odds of a July start rising," she added.

Futures traders currently assign a probability of just under 65 per cent that the Fed will have started cutting rates by mid-June, according to CME Group data.

After rising by 1 per cent in January, personal income rose by a more modest 0.3 per cent last month, the Commerce Department said.

Personal savings as a percentage of disposable income dropped substantially from a revised 4.1 per cent in January to 3.6 per cent in February, indicating that consumers are using up more of their savings as prices continue to tick higher.

The inflation figures are being closely watched by the White House as President Joe Biden seeks reelection in November.