Inflation fell to 4.2% in March, according to key gauge watched by Fed

Inflation Falls to 4.2% Annual Rate in March

The latest gauge favored by the Federal Reserve shows that inflation fell to a 4.2% annual rate in March. This decline in the personal consumption expenditures price index indicates that inflationary pressures are abating in the face of the Fed’s campaign to slow economy-wide spending by hiking interest rates.

Economy Grew by 1.1% in First Quarter of 2023 Despite Rising Rates

Despite the rising rates, the economy grew by 1.1% in the first quarter of 2023. However, inflation is still running much hotter than the central bank’s target and dinging household purchasing power.

“The tide may be turning in the Fed’s inflation battle but more time will be needed to make that call,” said Chris Rupkey, an economist for FWDBONDS.

Core Inflation Still Above Fed’s Target

Most notably, “core” PCE inflation, a measure of inflation that strips out energy and food prices and is generally less volatile, declined by only a tenth of a percentage point to a 4.6% year-over-year rate. On a month-to-month basis, core inflation rose 0.3% — which would mean an annual rate well above the Fed’s target, which is 2%.

Inflation Continues to Fall Back to Earth

Other recent measures of inflation have shown that prices are continuing to fall back to Earth from the highs notched last year, which marked the country’s worst inflationary plague in decades. Earlier this month, the Bureau of Labor Statistics announced inflation fell nearly a percentage point to 5% in the year ending in March in an update to the consumer price index, the lowest such rate since May 2021. In addition, inflation plunged to a 2.7% annual rate in March, as measured by the producer price index — the lowest level in more than two years.

Fed to Decide Whether to Hike Interest Rates

The Fed will meet next week to decide whether to hike interest rates, although there are mixed opinions on whether the central bank should hike rates at all. The rate hike would come amid signals the labor market is finally softening in response to the year of monetary tightening, something that Fed officials had been hoping to see.

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