The US Commerce Department reported that the core personal consumption expenditures (PCE) price index rose 3% year-on-year in February. The data marked a slight decline from January and met analysts’ expectations. The small decline came just before the start of the Iran conflict that has triggered a surge in global energy prices.
The headline inflation measure, which includes food and energy, rose 2.8% year-on-year, unchanged from the previous month. On a monthly basis, both the core and headline rates rose 0.4%. The figures paint a picture of a stable economy that is still above the central bank’s long-term target.
The Federal Reserve (Fed) relies heavily on PCE data as its primary guide to setting interest rate policy. While the February data showed a very slow downward trend, it gives policymakers a baseline of information about the state of inflation before supply chain disruptions due to the closure of the Strait of Hormuz began to affect commodity prices.
Analysts caution that the data may not reflect current price pressures because it was collected before the outbreak of major wars in the Middle East. The surge in crude oil prices, which are now at extreme levels, is expected to start showing up in inflation reports in March and April, which could reverse the downward trend in core inflation.
For now, the Fed has maintained its inflation target at 2%. Since core PCE data is considered a more accurate indicator of long-term trends, the 0.1 percentage point drop provides some temporary relief to financial markets that have been worried about the risk of stagflation due to prolonged military conflicts.
