Fed’s Preferred Inflation Measure Rises to 3.5 Percent in March Amid Iran War

The Federal Reserve’s preferred inflation measure surged in March as U.S. consumers continue to face price pressures amid the war in Iran.

March’s annual personal consumption expenditures (PCE) price index inflation advanced to 3.5 percent from 2.8 percent in February, according to new Bureau of Economic Analysis data released on April 30.

This was in line with economists’ expectations.

The Iran war—nearing its 10th week—has sharply increased global energy prices. Crude oil remains above $100 per barrel, while national average gasoline prices are above $4 per gallon.

Excluding the volatile energy and food prices, the 12-month core PCE inflation edged higher to 3.2 percent in March, from 3 percent in February.

On a monthly basis, PCE and core PCE inflation climbed by 0.7 percent and 0.3 percent, respectively. These readings also matched the consensus forecast.

President Donald Trump is locked in a standoff with Tehran.

Trump said on April 29 that he will maintain the blockade against Iran until an agreement is in place, while the regime has refused to reopen the Strait of Hormuz until the United States removes its naval presence.

Oil prices took a breather during the April 30 trading session, but the U.S. and global benchmarks remain firmly above $100 per barrel.

Income, Growth, and Employment

Despite the jump in inflationary pressures, personal income rose by a higher-than-expected 0.6 percent, up from the upwardly revised zero percent in February.

The Bureau of Economic Analysis also reported on April 30 that the U.S. economy expanded by 2 percent in the first quarter, from the anemic 0.5 percent pace in the previous three-month span.

Markets had forecast an expansion of 2.3 percent.

Growth was broad-based, fueled by consumer spending, private investment, and exports. Additionally, the bureau registered a rebound in government outlays—the record-breaking shutdown sent outlays collapsing in the fourth quarter.

The U.S. labor market was also intact, with applications for unemployment benefits collapsing below 200,000 last week.

Overall, these numbers indicate that the U.S. economy is doing well, said Gina Bolvin, president of Bolvin Wealth Management Group.

“The [gross domestic product], PCE, and income data show an economy that’s accelerating—but unevenly,” Bolvin said in a note emailed to The Epoch Times.

“Growth near 2 [percent] is being powered by [artificial intelligence-driven] investment, while inflation, particularly core PCE, remains elevated.”

This is also creating a challenging situation for the Federal Reserve and financial markets, she added.

Robust consumer spending and stable employment conditions are occurring while inflation remains above the central bank’s 2 percent target.

At the April Federal Open Market Committee meeting, the Fed left interest rates unchanged for the third straight time, keeping the benchmark federal funds rate in a range of 3.5 percent to 3.75 percent.

Futures market data suggest that traders are still pricing in monetary policymakers staying on hold for the foreseeable future. However, according to CME FedWatch, the odds of a rate hike over the next 12 months are increasing.

The Fed voted 8–4 to leave rates unchanged.

“Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook,” the Fed said in a statement. “Inflation is elevated, in part reflecting the recent increase in global energy prices.”

One member—Fed board member Stephen Miran—wanted a quarter-point rate cut. The other three—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan—supported standing pat, but did not approve “the inclusion of an easing bias” in the post-meeting statement.

U.S. stocks were mixed following the latest tranche of data.

The blue-chip Dow Jones Industrial Average jumped by almost 600 points, or 1.2 percent. The broader S&P 500 edged higher by about 0.4 percent, while the tech-heavy Nasdaq composite index was little changed.

“This is a cycle where innovation is lifting growth, but inflation is limiting how far markets can run,” Bolvin said.

Next week will offer insights into how the U.S. labor market is performing amid the nine-week-old conflict, as data on job vacancies, private payrolls, and layoffs will be released.

The April jobs report will be the main event on May 8. Early estimates suggest that the economy added 95,000 new jobs in April.