Key US inflation measure sees first drop in 16 years

Columbia: The US Federal Reserve`s preferred inflation measure fell in March, and a key component dropped for the first time in nearly 16 years, the Commerce Department reported Monday.

It was another sign of soft prices as several measures of inflation have retreated in recent months, removing some of the pressure on central bankers to raise the benchmark interest rate more rapidly. 

But economists say tight labor markets, falling unemployment and strong job creation likely mean the Fed will stay on track to raise rates twice more this year, for a total of three hikes.

The central bank is due to consider monetary policy Tuesday and Wednesday and is not expected to adjust interest rates at this meeting. 

The Personal Consumption Expenditures price index, which tracks the value of goods and services purchased by individuals, fell 0.2 percent in March in its first drop since February 2016 and its biggest decline since January 2015.

But core PCE, which excludes the volatile food and energy categories, dropped by a tenth, the first decline since September 2001.

Analysts had been expecting the core measure to remain unchanged for the month.

The longer-term trends also showed a slowdown. The 12-month measure for the PCE price index slowed to 1.8 percent, below the Fed`s two percent target and down from 2.1 percent in February, which had been a five-year record.

The core for the latest 12 months also slowed, falling to 1.6 percent from 1.8 percent.

The PCE decline came after closely watched measure of inflation, the Consumer Price Index, also fell in March.

However, some analysts noted special factors that may have contributed to the decline in both.

Ian Shepherdson of Pantheon Macroeconomics said cell phone plan pricing held down the PCE inflation measure, just as it did for CPI.

"We see further upside risk ahead," he said, noting the annual change for healthcare services rose a tenth of a percentage point to 1.6 percent, its highest level in four years.

Jim O`Sullivan of High Frequency Economics agreed the "underlying trend is still at least modestly upward." 

Meanwhile, personal incomes were up 0.2 percent in March, an increase of $40 billion, while spending rose less than 0.1 percent, an increase of $5.7 billion.

O`Sullivan noted "the weakness in spending in Q1 contrasts with the much stronger signal from the confidence data. We believe the `truth" is in the middle, and confidence and spending will converge in coming months."