Fed’s favorite inflation gauge eases slightly in February, but prices remain high

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An inflation measure closely watched by the Federal Reserve showed signs of slowing in February, but it still remained abnormally high, according to new data released Friday.

The personal consumption expenditures (PCE) index showed that consumer prices rose 0.3% from the previous month and climbed 5% on an annual basis, according to the Bureau of Labor Statistics. 

Those figures are both lower the 0.6% monthly increase and 5.3% headline jump recorded in January, a welcoming sign for the Federal Reserve as it tries to crush runaway inflation with the most aggressive series of interest rate hikes since the 1980s. 

Core prices, which strip out the more volatile measurements of food and energy, climbed 0.3% from the previous month and 4.7% year-over-year, slower than Refinitiv economists expected.


While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation. Both the core and headline numbers point to inflation that is running well above the Fed’s preferred 2% target.

“The inflation trend looks promising for investors,” said Jeffrey Roach, chief economist at LPL Financial. “Inflation will likely be below 4% by the end of the year, giving the Federal Reserve some leeway to cut rates by the end of the year if the economy falls into recession.”


Other figures included in the report showed that consumer spending rose just 0.2% in February, compared with a 1.5% jump in January. Economists expected personal spending to rise 0.3% last month. 

Stocks climbed on the softer-than-expected data, with futures tied to the Dow up 0.2% in early morning trading.

Ticker Security Last Change Change %
I:DJI DOW JONES AVERAGES 33274.15 +415.12 +1.26%
I:COMP NASDAQ COMPOSITE INDEX 12221.906686 +208.44 +1.74%
SP500 S&P 500 4109.31 +58.48 +1.44%

Policymakers have already approved nine straight interest rate hikes and opened the door to a tenth increase at their next meeting May 2-3. Investors see about an even chance that the Fed pauses rate increases in May, or that it approves another quarter-percentage point hike, according to the CME Group’s FedWatch tool, which tracks trading.

But traders expect the Fed to pivot and start reducing the federal funds rate as soon as July, eventually trimming as much as a full percentage point by the end of the year. 

Still, Fed officials have been adamant that they do not intend to slash rates this year. 

“Participants expect relatively slow growth, a gradual rebalancing of supply and demand in the labor market, with inflation moving down gradually,” Fed Chairman Jerome Powell told reporters in Washington last week. “In that most likely case, if that happens, participants don’t see rate cuts this year. They just don’t.”

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