Inflation in America has increased as expected in February and is expected to continue rising in March in the context of the war with Iran, a trend that is likely to discourage the Federal Reserve from reducing interest rates for some time.
The index of personal consumption expenditures rose by 0.4% after a previous increase of 0.3% in January, according to the Bureau of Economic Analysis of the Department of Commerce. Economists surveyed by Reuters had predicted a 0.4% increase in the index of personal consumption expenditures. Over the 12 months preceding February, PCE inflation rose by 2.8% after a similar increase in January.
The BEA is still catching up on data publication after delays caused by the government shutdown last year. Inflation was already high before the war, largely due to import tariffs imposed by President Donald Trump.
The war between the United States, Israel, and Iran has driven up global oil prices and pushed the national average retail price of gasoline above $4 per gallon for the first time in over three years. Economists anticipate that the inflationary effects of the conflict, which began at the end of February, will be more pronounced in the March data. President Donald Trump announced a two-week ceasefire on Tuesday, provided that Tehran reopens the blocked Strait of Hormuz, which has also impacted fertilizer and other goods shipments. These disruptions are expected to lead to higher food prices. Excluding volatile components like food and energy, the PCE price index rose by 0.4% in February, the same increase for a third consecutive month. Over the 12 months preceding February, so-called “core” inflation increased by 3.0%, following a 3.1% rise in January.
The slowdown in year-over-year core PCE inflation is due to the fact that high figures from the previous year are no longer included in the calculation.
The US central bank monitors PCE price measures to achieve its 2% inflation target. Economists believe that the monthly PCE index inflation must increase by 0.2% for an extended period to bring inflation back to its target level. The minutes of the Fed’s policy meeting on March 17 and 18, published on Wednesday, showed that a growing group of Federal Reserve policymakers estimated last month that interest rate hikes may be necessary to counter inflation.
The minutes also indicated that “participants noted that a prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices, and that these higher input costs were more likely to impact core inflation.”
The Fed kept its benchmark interest rate in the range of 3.50% to 3.75%. The likelihood of a rate cut this year has greatly diminished. The increase in prices partially explains the rise in expenses in February. Consumer spending, which accounts for more than two-thirds of economic activity, increased by 0.5% after a 0.3% increase in January. Economists had predicted a 0.5% increase.
The high price of gasoline could divert spending from other categories, although significant tax refunds this year may allow low-income households some flexibility. The war wiped out around $3.2 trillion from the stock market in March, which could lead high-income households to reduce their spending. They have been the main drivers of spending and the economy in general.
