A recent assessment of the Federal Reserve’s preferred inflation measure indicates that prices remained high prior to the outbreak of conflict in Iran, leading analysts to believe the central bank will maintain its current stance.
In February, the Personal Consumption Expenditures (PCE) Index recorded an inflation rate of 2.8%. When excluding the fluctuating costs of food and energy—considered the ‘core’ inflation—the rate stood at 3%. Both figures were within anticipated ranges but still significantly above the Fed’s target of 2% inflation.
The core PCE has stabilized around 3% for three consecutive months, and when considered on an annualised three-month basis, it now stands at 3.7%. Joseph Brusuelas, Chief Economist at RSM, remarked that these numbers do not depict a strong economy, especially in light of geopolitical tensions. He noted that the sustained increase in core inflation is troubling for the Fed, particularly since inflation has exceeded their target for over six years, influenced by persistent tariffs driving up prices.
Federal Reserve officials are closely monitoring the impact of recent tariffs and rising oil prices on inflation, as both factors have been contributing to higher costs. Chicago Fed President Austan Goolsbee expressed concerns that the ongoing oil shock, juxtaposed with tariff-induced inflation, could lead to stagflation—a situation characterised by stagnant economic growth alongside high inflation—before the current inflationary pressures resolve.
Minutes from the Fed’s March policy meeting also highlighted expectations that rising oil prices would exacerbate inflation in the short term, potentially delaying a return to the desired 2% inflation target. Officials warned that a drawn-out conflict in the Middle East could result in sustained increases in energy prices, subsequently affecting input costs and contributing to a rise in core inflation.
The minutes concluded that most participants acknowledged that progress towards the Fed’s inflation target may be slower than previously anticipated and recognised the heightened risk of persistent inflation above the set objective.
In summary, the latest inflation readings indicate a tough economic landscape, with external pressures from tariffs and geopolitical tensions potentially prolonging inflationary challenges for the Federal Reserve.
