Federal Reserve's key inflation metric slows in February

Markets rally to close out strong quarter as traders see hopes that central bank may pause interest-rate increases

Consumer spending also increased by 0.2 per cent last month. AFP

A key US inflation gauge closely monitored by the Federal Reserve slowed in February in an encouraging sign that the central bank's interest rate increases are helping to ease price pressures.

The Personal Consumption Expenditures Price Index, known as the PCE, rose 0.3 per cent from January to February, a slowdown from a 0.6 per cent increase from December to January, data released by the Commerce Department on Friday showed. On an annual basis, consumer prices rose 5 per cent, down from 5.3 per cent in January.

Excluding food and energy costs, prices rose by 0.3 per cent in February.

Consumer spending rose 0.2 per cent last month. January's data was revised slightly higher to show spending surged 2 per cent instead of 1.8 per cent as previously reported.

US stocks gained to close out a strong quarter as hopes grow that signs of a cooling economy indicate a less aggressive monetary policy stance by the Fed.

The Nasdaq had climbed 1.44 per cent on the day when trading closed as it recorded its strongest quarter since June 2020. The Dow Jones gained 415 points, or 1.26 per cent, and the Nasdaq Composite climbed 1.74 per cent.

"We are making progress in the fight against inflation," President Joe Biden said in a statement.

Even though Friday's report shows signs that inflation is cooling, annual year-on-year price increases are well above the Fed's long-term 2 per cent goal. Revised forecasts from the central bank released last week showed they estimate PCE inflation to fall to 3.3 per cent by the end of the year.

The Fed has raised interest rates nine times in a year-long fight to the range of 4.75 per cent and 5 per cent to tackle the soaring costs of goods in the US.

Policymakers' plans to issue more aggressive rate raises were complicated by the banking turmoil that stemmed from the collapse of Silicon Valley Bank and Signature Bank. Fed Chair Jerome Powell told reporters that the banking turmoil will likely result in tighter lending conditions as a sort-of interest-rate increase itself.

The Fed prefers relying on PCE data instead of the Consumer Price Index because it provides a more comprehensive understanding of how households react to rising prices.