Lucia Muticani
WASHINGTON (Reuters) – U.S. monthly inflation rose moderately in March, but continued rises in housing and utility costs could mean the Federal Reserve will continue to raise interest rates for some time. It has been suggested.
A report released by the Commerce Department on Friday also showed solid consumer spending last month, and stagflation after Thursday's data showed a spike in inflation and slowing economic growth in the first quarter. This provided some relief to financial markets, which had been frightened by concerns about the
“The market should breathe a sigh of relief this morning,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Given rising inflation levels, markets will need to dispel expectations for Fed rate cuts as this will be the new normal in 2024.”
According to the Commerce Department's Bureau of Economic Analysis, the personal consumption expenditures (PCE) price index rose 0.3% last month, matching the increase in February before the revision. Commodity prices rose 0.1% as higher prices for gasoline, clothing and footwear were partially offset by lower prices for cars and parts.
Service prices rose 0.4%, accelerating from February's 0.3% rise. This was driven by a 0.5% rise in housing costs, including rent, and utility costs. Rents remain stable, even as the supply of apartments increases and independent indicators show a decline in rental demand.
Economists expect these rent declines to start showing up in the data at some point this year. Prices for transportation services increased by 1.6%, while prices for financial services and insurance increased by 0.5%.
Inflation rose 2.7% in the 12 months to March after rising 2.5% in February. Last month's rise in inflation was roughly in line with economists' expectations.
Inflation could be higher than expected in March after preliminary first-quarter gross domestic product (GDP) reports released on Thursday showed price pressures at their highest in a year. There were concerns.
The spike in inflation occurred in January. The PCE price index is one of the inflation indicators tracked by the US central bank towards a 2% target. For inflation to return to target, long-term monthly inflation would need to be 0.2%.
U.S. Treasury prices rose, with the benchmark 10-year Treasury yield retreating from its five-month high in the previous session. The dollar strengthened against a basket of currencies, and stocks on Wall Street rose.
Fed policymakers are expected to keep interest rates on hold next week. The central bank has kept the benchmark overnight interest rate in the range of 5.25-5.50% since July. The policy rate has been raised by 525 basis points since March 2022.
Financial markets initially expected the first rate cut to occur in March. The forecast was pushed back to June and then September as data on the labor market and inflation continued to be better than expected.
A small number of economists continue to expect borrowing costs to fall in July as they see the labor market slowing significantly in coming months. Some believe that the window for lower interest rates is rapidly closing.
“Fed officials likely don't have enough evidence based on inflation statistics alone to cut rates as early as June,” said Veronica Clark, an economist at Citigroup. “But officials are increasingly uncomfortable with leaving rates at restrictive levels for too long, and we continue to think that May and June inflation data will show evidence of a July rate cut. ing”
Service inflation is hot
Excluding the volatile food and energy components, the PCE price index increased by 0.3% in March after increasing at the same rate in February. Core inflation rose 2.8% year-on-year in March, matching February's growth.
PCE services inflation, which excludes energy and housing, rose 0.4%, following a 0.2% rise in February. The so-called supercore inflation rate rose 3.5% in March compared to the same month last year.
Policymakers monitor supercore inflation to gauge progress in combating inflation.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.8%, matching February's increase. The data, included in the GDP report, showed that consumer spending slowed to a still robust 2.5% pace in the first quarter from a strong pace of 3.3% in the October-December period.
Economic growth last quarter was 1.6%, but it was held back by a rising trade deficit. The widening trade gap reflected the rapid increase in imports due to strong domestic demand.
Last month, households increased spending on both goods and services. Goods spending rose 1.3%, with gasoline and other energy products, food and beverages, recreational supplies and motor vehicles, and household equipment accounting for the increase.
Spending on services rose 0.6%, boosted by health care, housing and utilities, as well as financial services and insurance.
After adjusting for inflation, personal consumption increased by 0.5%. So-called real personal consumption expenditure also increased by 0.5% in February. Strong growth in March puts consumer spending on a higher growth trajectory heading into the second quarter.
“There appears to be solid consumer momentum since the first quarter,” said JPMorgan economist Daniel Silver. “While we don't have much hard data for the second quarter at this point, the closing numbers for the first quarter suggest that spending growth in the second quarter could be strong.”
Personal income rose 0.5%, following a 0.3% increase in February, due to a 0.7% rise in wages amid a tight labor market. However, some of the gains were eroded by rising inflation.
Household disposable income, which takes into account inflation and taxes, rebounded 0.2% after falling 0.1% in February. Consumers reduced their savings and also leveraged their savings. The savings rate fell to 3.2%, the lowest level in 16 months, from 3.6% in February.
“Low savings rates are not a major concern because it reflects the fact that household debt-to-income ratios are low, debt servicing costs remain extremely low, and household net worth is growing rapidly amid rising prices. “We believe that this primarily reflects the strength of the balance sheets of “house prices and stock prices,'' said Michael Pearce, deputy chief U.S. economist at Oxford Economics.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)