Inflation moves closer to Fed target

Inflation is finally moving closer to the Fed’s targeted 2%, with consumer prices accelerating in the year through March, although this is not expected to change the Fed’s plan to gradually increase interest rates.

According to the Commerce Department, the core personal consumption expenditures (PCE) rose to 1.9% in the year through March, the largest increase since February 2017 but in line with expectations. Through February the reading was 1.6%. The move higher puts the core PCE, which measures consumer costs minus the volatile energy and food categories, closer to the Fed’s 2% target.

Persistently low inflation while the economy has been strong has perplexed economists and the Fed alike. But the recent move higher, in line with the Fed’s expectations, is unlikely to pressure to Fed to act more aggressively when it comes to rate hikes, analysts say. High inflation can derail an economy, and when the economy shows signs of overheating the Fed may consider raising interest rates.

Minutes from the Fed’s March 20-21 policy meeting showed Fed officials expect the annual PCE price index to accelerate in March, partly because of “the arithmetic effect of the soft readings on inflation in early 2017 dropping out of the calculation.”

The Fed meets again this week, on Tuesday and Wednesday. The Fed increased rates last month, and forecast two more rate hikes this year, but it is not expected to hike rates at the May meeting.