The Federal Reserve’s inflation report showed that inflation is still staying high in the U.S. economy. This could make the central bank more cautious about lowering interest rates in the coming months.
The report showed that core inflation, which excludes food and energy prices because they can change a lot, increased by 0.3% during the month. On a yearly basis, core inflation rose 3.4%, according to data from the U.S. Commerce Department.
The 3.4% annual core inflation rate matched economists’ expectations in a Dow Jones survey. It was also the highest level of core PCE inflation since October 2023, showing that inflation remains difficult to bring under control. This data is important because the Federal Reserve closely follows the Personal Consumption Expenditures (PCE) Price Index when deciding whether to raise, lower, or keep interest rates unchanged.
Core PCE inflation
Looking at overall inflation, including food and energy, the headline PCE index rose at a 4.1% annual rate, according to the Commerce Department report.
The 4.1% annual headline inflation rate was the highest level seen since April 2023. On a monthly basis, the overall PCE inflation measure increased 0.4%.
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Economists surveyed by Dow Jones had expected the annual headline inflation figure to be around the same level. However, the monthly increase came in 0.1 percentage point lower than forecasts.
Even though the Fed looks at both headline inflation and core inflation, policymakers usually pay more attention to the core reading when judging long-term inflation trends, as noted by CNBC. Fed officials believe the core measure gives a clearer picture because it removes food and energy prices, which can move sharply from month to month.
A major reason inflation has remained elevated this year has been higher energy prices linked to the Iran war.
Fed rate outlook
Those higher energy costs have gradually spread into other parts of the economy, making inflation more widespread.
The latest inflation numbers support recent comments from Federal Reserve officials that inflation remains a concern. The report was released just over a week after the Federal Reserve held its latest policy meeting.
At that meeting, Fed officials delivered what financial markets viewed as a tough message on inflation and interest rates. The meeting was also notable because it came under new Fed Chairman Kevin Warsh.
Markets interpreted the Fed’s recent comments as a signal that policymakers are not yet convinced inflation is fully under control. The stronger-than-expected inflation trend shown in recent months could make Fed officials less willing to rush into rate cuts, according to CNBC.
For investors, the data suggests the Federal Reserve may continue keeping interest rates higher for longer if inflation remains above its target.
