In February, the Federal Reserve’s preferred measure of inflation jumped well beyond forecasts. This detail is from a new report released by the Commerce Department. The core personal consumption expenditures (PCE) price index increased 0.4% month-over-month. This marked a larger than expected increase, with forecasts calling for just a 0.3% increase. At the same time, consumer spending grew by 0.4%, but that was under the expected 0.5% increase.
This jump in the core PCE price index has pushed the 12-month inflation rate down to 2.8%. Looking at inflation overall, all items including food and energy increased by 0.3% this month. From a year earlier, it is up 2.5%. Inflation pressures remain elevated and persistent. This will have profound implications on what future monetary policy decisions should look like in the Federal Reserve.
That was a big factor as the Bureau of Economic Analysis told us that services prices spiked by 0.4% this month. By contrast, goods prices only increased 0.2%. In particular, the index for recreational goods and vehicles increased 0.5%, accounting for over one-third of the total advance in the index for goods.
The PCE inflation measure is especially important because it accounts for shifts in how consumers spend money. The Labor Department’s consumer price index gives greater weight to rising costs of housing. The Federal Reserve is widely reported to use the PCE inflation reading as their preferred monetary policy guide.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, commented on the current situation:
“It looks like a ‘wait-and-see’ Fed still has more waiting to do.”
This quote perfectly captures where we are still at with respect to the unknown future course of inflation and what that could mean for Federal Reserve action.
This increase in consumer spending suggests that the economy remains strong in the face of ongoing inflation. Additionally, the Bureau of Economic Analysis announced that consumer spending was up 0.4% for the month of February, further pointing to strong and persistent consumer demand. The number came in slightly under the predicted increase of 0.5%.
The Federal Reserve’s decision to prioritize the PCE inflation reading highlights how important this statistic is in driving monetary policy decisions. Now, inflation is coming in hotter than predicted. Policymakers at every level need to go back to the drawing board to address these ominous economic dynamics head on.