Washington, April 29 (Agency) The Personal Consumption Expenditure (PCE) Index, a US inflation indicator closely followed by the Federal Reserve, grew 6.6 per cent in the year to March, keeping to its fastest expansion in four decades, data from the Commerce Department showed on Friday. The so-called core PCE Index, stripped of food and energy prices, however, rose by a slower 5.2 per cent in the 12 months to March after a 5.4 per cent growth in the year to February, the data showed. That was the fastest growth since 1983. “Energy prices increased 33.9 per cent while food prices increased 9.2 per cent,” the department said in a news release that explained the higher headline inflation number. The Federal Reserve sees the PCE index as the most accurate measure of price pressures in the United States.
Economists familiar with the index say it provides granularity that even takes into account consumer substitution of cheaper goods for more expensive ones, say ground beef for filet mignon or frozen spinach for fresh ones. The central bank is moving to raise interest rates rapidly to try to cool off inflation, but economists say it will take time to suppress the runaway growth in prices. Economists also caution that the economy could go into recession if rates rise too much, too fast. After a 3.5 per cent contraction in 2020 gross domestic product forced by the coronavirus crisis, the US economy grew by 5.7 per cent in 2021 — the biggest calendar-year growth since 1984. But inflation grew even faster, with the PCE Index rising 5.8 per cent for all of last year, the largest annual increase since July 1982. Inflationary pressure continued in the first quarter of 2022, where GDP fell by 1.4 per cent. If it contracts in the second quarter as well, the United States would automatically be in recession.
The last time the economy slipped into recession — which is technically defined as two straight quarters of negative growth — was in the aftermath of the 2020 Covid-19 outbreak. After slashing US interest rates to nearly zero at the height of the coronavirus outbreak, the Federal Reserve’s policy-making Federal Open Market Committee (FOMC) approved the first pandemic-era rate hike on March 16, raising rates by 25 basis points. That brought key lending rates to between 0.25 per cent and 0.5 per cent. Many FOMC members have concluded since that the March hike was too tame to rein in inflation galloping at 40-year highs. They are pushing for “one to two” 50-basis point hikes in the near term to get a better grip on fighting inflation. Expectations are that the FOMC meeting on May 3-4 will agree on the first of such 50 bps hikes. All in, the FOMC members are considering as many as seven rate hikes this year and expect monetary tightening to continue into 2023 if the inflation does not drop to desired levels.