Federal Reserve’s Favorite Inflation Gauge Signals Price Pressures Ease Up

The recent dip in the measure of inflation closely monitored by the Federal Reserve signals a continued ease in price pressures. Last month’s core prices, excluding volatile food and energy costs, indicated a decrease in inflation pressures. Economists consider core prices to be a reliable indicator of future inflation trends. The alleviation of supply chain bottlenecks has led to reduced material costs, while a surge in job seekers has allowed employers to keep wage growth in check, a key factor driving inflation.

Despite these positive signs, inflation still hovers above the Fed’s 2% annual target, causing public concern as high prices strain American households, despite a noticeable rise in average wages. The inflation surge that began in the spring of 2021, as the economy rebounded from the pandemic-induced recession, overwhelmed production facilities, ports, and transportation hubs with a flurry of orders. Analysts are now hopeful that a delicate “soft landing” can be achieved by the Fed – curbing inflation without triggering a recession – thanks to the combination of easing inflation, robust growth, and employment numbers.

With expectations high for the Federal Reserve to attain this soft landing, if inflation continues to subside, the central bank may start reducing its key interest rate in the near future. While consumer prices saw a modest 0.3% uptick from January to February, economists like Michael Pearce from Oxford Economics believe this is still too high for the Fed’s comfort. The Fed generally favors the personal consumption expenditures price index over the consumer price index as its primary inflation gauge, as the PCE index adjusts for changes in consumer behavior during inflationary periods.

The PCE index typically shows a lower inflation rate compared to the CPI, mainly because of differences in how each index accounts for factors like rents. The recent government report revealed a 0.3% increase in Americans’ incomes in February, a significant drop from the 1% surge in January, which was bolstered by annual adjustments in Social Security and government benefits. As the Fed keeps a close eye on these inflation indicators and economic indicators, the path to achieving a soft landing remains a priority amidst the ongoing economic recovery.