The news solidifies expectations of another Fed rate hike
According to a recent report from the Commerce Department, key measures of prices and wages remained high in March.
This means that the Federal Reserve is on track to raise interest rates next week for the 10th time since March of last year, in its efforts to control inflation.
The report stated that the index, which the Fed closely follows, rose 0.3% from February to March and 4.6% from a year earlier.
This index excludes volatile food and energy costs to capture “core” inflation.
The figure is still far above the Fed’s 2% target rate. Some Fed officials are concerned that core inflation hasn’t declined much since reaching 4.7% in July.
The Labor Department's separate measure issued on Friday showed that workers' pay and benefits rose 1.2% in the first three months of this year, faster than the 1.1% rise in the last quarter of last year.
While this trend is good for employees, the Fed is worried that companies will seek to offset their higher labor costs by further raising prices and perpetuating high inflation. The Fed regards wage increases above roughly 3.5% as too high for it to reach its 2% inflation target.
These latest inflation figures highlight the dilemma confronting officials at the Federal Reserve. Across the economy, price increases for many goods have slowed significantly. Some previous drivers of inflation, notably clogged supply chains, have eased.
Yet prices for many services, including restaurants, auto insurance, and hotel rooms, are still surging, fueled by greater demand from consumers who have enjoyed rising wages.
Given the still-high levels of hiring and wage growth, economists expect the Fed to raise rates again next week and to keep them high through the end of the year.
If the Fed raises its benchmark rate next week by a quarter-point, it would reach 5.1%, the highest level in 17 years.
“We need job growth to slow much more quickly than it currently is,” said Ryan Sweet, chief U.S. economist at Oxford Economics, a consulting firm. “And until we start to see signs of that, I think the Fed is going to err on the side of doing too much.”
The Fed’s rate increases are intended to slow borrowing and spending, cool the economy and conquer high inflation.
But in the process, the rate hikes typically lead to higher costs for many loans, from mortgages and auto purchases to credit cards and corporate borrowing, and heighten the risk of a recession. Most economists foresee a recession this year as a consequence.
However, Friday's data did include some encouraging signs regarding inflation. Overall prices only ticked up by 0.1% from February to March, the smallest monthly rise since last July, and down from a 0.3% increase from January to February.
Compared with a year ago, inflation slowed to just 4.2%, although much of that decline reflected lower gas prices, which are particularly volatile. That is the lowest year-over-year overall inflation figure in nearly two years.
The Fed prefers the inflation gauge called the personal consumption expenditures (PCE) price index, over the government’s better-known consumer price index.
Typically, the PCE index shows a lower inflation level than CPI. In part, that’s because rents, which have been among the biggest drivers of inflation, carry twice the weight in the CPI that they do in the PCE.
On Thursday, the government reported that the economy expanded at just a 1.1% annual rate in the January-March quarter, much less than the 2.6% growth in the previous quarter, a sign the Fed's hikes are starting to slow growth.
