(Bloomberg) -- Two key gauges showed persistent US inflation pressures in recent months, buttressing the case for another Federal Reserve interest-rate hike next week.
The personal consumption expenditures price index excluding food and energy, the Fed’s preferred measure of underlying inflation, rose 0.3% in March from the prior month and 4.6% from a year earlier, a Commerce Department report showed Friday. The Fed targets 2% based on a broader measure but views the core gauge as a better indicator of the trend.
Meanwhile, the Labor Department’s measure of employment costs — also closely watched by the Fed — increased 1.2% in the first quarter from the previous period, exceeding forecasts, according to a separate report.
The price data, especially in conjunction with rising labor costs, reinforce forecasts that Fed policymakers will raise their benchmark interest rate another quarter percentage point at next week’s meeting. While annual inflation has peaked, the path back to the central bank’s 2% goal is proving bumpy.
One silver lining in the PCE report was a deceleration in a closely watched measure of services costs. Prices of services excluding housing and energy services, a key gauge flagged by Fed Chair Jerome Powell, increased 0.2% in March, according to Bloomberg calculations. That said, on a year-over-year basis, the metric remains elevated at 4.5%.
There is a concern sticky service-sector inflation, in part due to strong wage growth in those industries, risks keeping price growth above the Fed’s target for the foreseeable future. That said central bank officials are divided in their assessment of the impact of rising wages on inflation.
The S&P 500 rose, two-year Treasury yields fluctuated and the dollar remained stronger.
Labor costs in the US have risen at least 1% for seven straight quarters, extending what was already a record streak in data back to 1996, the Labor Department data show.
What Bloomberg Economics Says...
“The data strongly support another 25-basis-point hike in the May 2-3 meeting, and may even persuade some Fed policymakers that rates are not yet at a sufficiently restrictive level. Our baseline is for the Fed to go on an extended pause after next week’s hike, but we now see a growing risk that they may need to do more.”
-Anna Wong, chief US economist
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While a strong labor market and excess savings have provided households with the wherewithal to spend, consumers are beginning to lose steam. Personal consumption expenditures, adjusted for prices, stagnated last month, reflecting a pullback in goods spending and tepid outlays for services, after a downwardly revised 0.2% drop in February.
The pullback in consumer spending suggests households are growing more guarded and cutting back on discretionary purchases. While a strong labor market, persistent wage growth and excess savings have bolstered consumers in the face of rising prices, the data imply momentum is fading.
Looking ahead, a lack of growth in spending — even if outlays manage to stay at a high level — would make it difficult for the economy to keep expanding.
The PCE price index was up 4.2% from a year earlier, a marked slowdown when compared to March 2022 that reflected a spike in energy prices immediately after Russia’s invasion of Ukraine. That said, it remains roughly double the Fed’s 2% target.
On an inflation-adjusted basis, outlays for goods dropped 0.4%, the most in three months and reflecting a slide in motor vehicle purchases. Services, meanwhile, edged up 0.1% due to housing and utilities.
Inflation-adjusted disposable income, the main support to consumer spending, increased 0.3%. Wages and salaries, unadjusted for prices, also rose 0.3% for a second month. The saving rate climbed to 5.1%, the highest since the end of 2021.
A separate report out Friday showed that longer-term inflation expectations ticked up in April. Consumers surveyed by the University of Michigan expect inflation to average 3% over the next five to 10 years, up from 2.9% in March.
--With assistance from Kristy Scheuble.
(Adds economist’s comment.)
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