Key Fed inflation gauge rose 2.8% annually in February, as expected

February’s economic data shows that inflation remains a concern for the Federal Reserve.

The core personal consumption expenditures (PCE) price index, excluding volatile food and energy, rose by 2.8% over the past year and increased by 0.3% compared to the previous month.

This means that inflation is rising at a faster pace than the Fed’s target of 2%.

Headline PCE inflation, which includes food and energy, also grew in February, driven by rising energy costs specifically, rising by 0.3% for the month and 2.5% for the year over year.

The rise in inflation is attributed to both the goods and services sectors, with goods rising by 0.5% and services by 0.3%.

Despite the ongoing inflation concerns, consumer spending surged by 0.8% in February, exceeding expectations.

However, personal income increased only by 0.3%, falling short of the projected 0.4% increase.

The Fed takes the core PCE inflation index as a primary measure of inflation when determining monetary policy.

Given that inflation is above their target, it is unlikely that the Fed will consider cutting interest rates anytime soon.

The market reacted relatively calmly to the data, as it was largely in line with expectations.

However, economists expect the Fed to remain on hold in May and begin cutting rates in June.

The CME Group’s FedWatch indicates that the market is aligned with the Fed’s projections for three rate cuts this year and in 2025.

In summary, while inflation remains elevated, consumer spending is strong, suggesting that consumers are not significantly impacted by inflation and continue to spend.

This combination of factors puts the Fed in a difficult position, as they balance the need to combat inflation while maintaining economic growth and employment.