What To Expect From Friday’s Key Report On Inflation

The Fed’s preferred gauge of inflation likely stayed stubbornly high in March, though the details of Friday’s official report could complicate the picture. 

The cost of living measured by the Bureau of Economic Analysis’s Personal Consumption Expenditures (PCE) index is expected to have increased 2.6% over the 12 months ending in March, according to a survey of forecasters by Dow Jones Newswires and The Wall Street Journal. That would be an acceleration from the 2.5% annual rate reported in February, and still above the 2% rate officials at the Federal Reserve target when they set the nation’s monetary policy. 

Economists also expect core inflation, which excludes volatile prices for food and energy, to have declined to 2.7% from 2.8% in February. That’s a key measure for anyone concerned with interest rates. 

Policymakers at the Fed closely watch core PCE as an indication of the trajectory of inflation because it’s not influenced by things like weather, which can move food and oil prices but are not linked to broader inflation trends. 

Inflation figures, however, have had a nasty habit of running hotter than expectations in the first three months of this year. Should that trend continue, it could prompt officials at the Federal Reserve to keep interest rates higher for longer to quash inflation by making all kinds of loans more expensive and cooling the economy. 

“Persistently disappointing dynamics in consumer prices are likely to lead Fed officials to look for a larger accumulation of evidence that points to inflation normalization before deciding to pull the trigger on rate cuts,” economists at TD Securities wrote in a commentary.