A dated reading on the Federal Reserve’s preferred inflation gauge showed prices remained elevated before the war in Iran broke out, reinforcing that the central bank will remain on hold.
Inflation for the month of February, as measured by the Personal Consumption Expenditures Index, rose 2.8%. On a “core” basis, excluding volatile food and energy prices, inflation clocked in at 3%. Both were in line with expectations.
Inflation remained a full percentage point above the Fed’s 2% inflation goal before oil prices spiked in response to the conflict.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
PCE on a core basis — what the Fed pays attention to — has been stuck around 3% for three months now. On an annualized three-month basis, core inflation is now 3.7%.
“[That] does not paint a flattering portrait of an economy on the edge of war,” said Joseph Brusuelas, principal and chief economist for RSM.
“The increase in the core metric, the best long run predictor of overall inflation, is far more problematic for central bankers that are now six years into a journey well above the Fed’s 2 percent inflation target, whether the ceasefire in the Gulf holds or hostilities resume in the near term,” Brusuelas added.
Fed officials are highly attuned to the fact that inflation has remained above their 2% goal for five years now, as tariffs are still pushing up goods prices and the oil shock bites.
Chicago Fed president Austan Goolsbee said Tuesday he’s concerned that the oil shock comes as tariffs were working their way through the economy and had already led to higher inflation that was expected to fade later this year
“My concern at this immediate time is that we’ve got to get our heads around an oil shock, which is going to drive up prices in a stagflationary way, potentially before the other one has gone away,” Goolsbee said.
Read more: How to protect your savings against inflation
Minutes from the Fed’s March policy meeting, which are also dated, showed that Fed officials expected higher oil prices would increase inflation in the near term and delay prices falling back toward their 2% goal.
Officials noted that a prolonged conflict in the Middle East would likely lead to longer-lasting increases in energy prices and that these would mean higher input costs that would be more likely to be passed through to “core” inflation.
“The vast majority of participants noted that progress toward the Committee’s 2 percent objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee’s objective had increased,” the minutes read.