Federal Reserve’s preferred inflation metric rose to 2.7% in March

Stay informed with free updates

Simply register at American inflation myFT Digest – delivered straight to your inbox.

U.S. inflation reached 2.7 percent in the year through March, another sign that price pressures remain stubbornly high, complicating the Federal Reserve’s plan to cut interest rates this year.

Data released Friday on personal consumption expenditures, the Fed’s preferred gauge of inflation, beat economists’ expectations for a slight increase to 2.6 percent from 2.5 percent in February.

The unexpected rise is likely to increase traders’ doubts that the Fed will cut interest rates this summer, with mortgage and other U.S. borrowing costs expected to remain high ahead of the November presidential election.

“Inflation is hot, it’s becoming persistent and widespread,” said Diane Swonk, chief economist at KPMG US. “Those are three things the Fed doesn’t want.”

The figures come a day after data showed the US economy grew much slower than expected in the first quarter, while inflation for the quarter remained above the Fed’s 2% target. , causing a massive sell-off in the stock markets and a rise in Treasury bonds. yields as traders reduced their bets on rate cuts.

Markets reversed some of those moves on Friday, with the S&P 500 index closing up 1 percent, while the tech-heavy Nasdaq Composite closed up 2 percent, helped by strong gains in the Google’s parent company, Alphabet..

Moves were more muted in government bond markets, with the policy-sensitive two-year yield broadly flat at 5 percent and the benchmark 10-year yield down 0.04 percentage points at 4.67 percent. Yields fall as prices rise.

The rise in inflation in March was largely due to a rise in oil prices, as tensions in the Middle East pushed up oil prices. Further inflation in energy costs would pose a risk of “cyclical stagnation” for an otherwise strong U.S. economy, said Freya Beamish, an economist at TS Lombard.

“If oil is pushed to $100 (a barrel), for primarily supply-side reasons, this could coincide with a wobble in the U.S. labor market, which is already in the making,” Beamish wrote in a note . Brent oil futures were trading at around $89.50 a barrel on Friday and are up about 18 percent this year.

Core PCE, which excludes volatile food and fuel prices, remained at 2.8 percent in March, compared with an expected decline to 2.7 percent.

The latest economic figures come as a blow to US President Joe Biden, whose re-election campaign has focused on steadily falling inflation, which hit a multi-decade high in 2022, as well as robust persistence of the American economy and labor market.

Lael Brainard, director of the White House National Economic Council, responded to the data by saying that “even though inflation has fallen more than 60 percent from its peak, today’s report reinforces the importance of our ongoing work to reduce costs.”

She said the Biden administration has taken steps to reduce prescription drug costs, prevent large companies from charging excessive fees to customers and increase the supply of housing.

But Biden himself recently said he expected the Fed to begin cutting rates this summer.

“The last three months of U.S. inflation really jumped and hit the Fed in the face,” said Ajay Rajadhyaksha, global president of research at Barclays.

Futures traders are now only fully integrating the quarter-point reduction decided by the Fed meeting on November 6 and 7, just after the presidential election.

US borrowing costs are at their highest level in 23 years, while the PCE index has been above the central bank’s 2% target since March 2021.

“We’re probably going to have persistent inflation from here on out,” said Tim Murray, multi-asset strategist at T Rowe Price. He argued that price pressures were fueled by factors including demand for chips, semiconductor materials for artificial intelligence and clean energy.

“The news is not good,” he added. “If you look at things on an annual basis, from just about every angle, it seems like the trend is sideways, if not slightly upward.”

Additional reporting by James Politi in Washington