Fed’s preferred inflation gauge shows price pressures stayed elevated last month

WASHINGTON (AP) — A measure of inflation closely tracked by the Federal Reserve remained uncomfortably high in March, likely reinforcing the Fed’s reluctance to cut interest rates anytime soon and underscoring a burden for President Joe Biden’s re-election bid.

Friday’s report from the government showed that prices rose 0.3% from February to March, the same as in the previous month. It was the third straight month that the index has run at a pace faster than is consistent with the Fed’s 2% inflation target. Measured from a year earlier, prices were up 2.7% in March, up from a 2.5% annual rise in February.

After peaking at 7.1% in 2022, the Fed’s favored inflation index steadily cooled for most of 2023. Yet so far this year, the index has remained stuck above the central bank’s target rate. More expensive gas and higher prices for restaurant meals, health care and auto repairs and insurance, among other items, have kept the overall pace of price increases elevated.

With new-car prices up sharply in the past few years, auto repair and replacement costs have risen especially fast. Auto insurance, a major driver of inflation in recent months, was up 8% in March from a year earlier.

Gas prices jumped again last month, the government said — up 1.6% just from February to March. So far in April, gas prices are up still further, to a national average of $3.66 a gallon, from $3.53 a month ago.

Grocery prices, though, were unchanged last month and are up only 1.5% from a year earlier.

“This isn’t going to sit overly well with the Fed,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “I think it’s clear that they’re going to keep rates higher for longer.”

Like many economists, Sweet envisions no rate cuts before September.

Friday’s inflation data showed that excluding volatile food and energy costs, “core” prices rose by an elevated 0.3% from February to March, unchanged from the previous month. Compared with a year earlier, core prices rose 2.8% for a second straight month. The Fed closely tracks core prices, which tend to provide a particularly good read of where inflation is headed.

The chronically elevated measures of inflation have become a source of frustration for the Fed, whose policymakers had projected as recently as last month that they expected to cut their benchmark rate three times this year. Most economists expected the cuts to begin in June. More recently, though, several Fed officials, including Chair Jerome Powell , have signaled that they have no immediate plans to cut their key rate, a move that would eventually lead to lower rates for mortgages, auto loans, credit cards and many business loans.

“Recent data have clearly not given us greater confidence” that inflation is coming fully under control, Powell said last week, and “instead indicate that it’s likely to take longer than expected to achieve that confidence.”

“If higher inflation does persist,” he added, “we can maintain the current level of (interest rates) for as long as needed.”

Many economists say they think the Fed may end up cutting its key rate only once or twice this year, perhaps beginning in September. Others say they think the central bank may not cut its benchmark rate at all in 2024.

One reason why inflation has remained persistently elevated is that many Americans are still willing to spend even at higher prices. In March, consumer spending jumped 0.8% for a second straight month, well above the rate of inflation. The spending figure underscored that even while the U.S. economy slowed in the first three months of 2024, consumer demand remained healthy, suggesting that economic growth remains on track.

Sweet said Friday’s figures suggest strong consumer spending is a key reason inflation has stayed stubbornly high in the first three months of this year.

Despite the continuing inflation pressures, robust gains in jobs and average wages have allowed many American consumers to continue spending at a healthy clip, supporting a still-durable economy. That helps explain why Fed officials have said they can afford to keep borrowing rates where they are for now. The economy did slow in the first three months of the year, the government reported Thursday, but consumers continued to fuel growth with their steady spending.