US Fed interest rate rise seen as probable as inflation persists

Inflation gauge watched by Federal Reserve shows prices still rising as consumer spending stalls

The Federal Reserve building in Washington. AFP

Two gauges showed persistent US inflation pressures in recent months, buttressing the case for another Federal Reserve interest rate increase next week.

The personal consumption expenditures price index excluding food and energy, the Fed’s preferred measure of underlying inflation, rose 0.3 per cent in March from the prior month and 4.6 per cent from a year earlier, a Commerce Department report showed on Friday.

The Fed aims for 2 per cent based on a broader measure but views the core gauge as a better indicator of the trend.

Meanwhile, the Labour Department’s measure of employment costs — also closely watched by the Fed — increased 1.2 per cent in the first quarter from the previous period, exceeding forecasts, according to a separate report.

The price data, especially in conjunction with rising labour costs, reinforces forecasts that Fed policymakers will raise their benchmark interest rate another quarter percentage point at next week’s meeting.

While annual inflation has peaked, the path back to the central bank’s 2 per cent goal is proving bumpy.

One silver lining in the PCE report was a deceleration in a closely watched measure of services costs.

Prices of services excluding housing and energy services, a gauge flagged by Fed Chairman Jerome Powell, increased 0.2 per cent in March, according to Bloomberg calculations.

That said, on a year-over-year basis, the metric remains elevated at 4.5 per cent.