Inflation In-Depth

Producer and consumer prices moved higher in March, but both remain manageable. Inflation has been a major topic for financial markets in 2018, with concerns initially sparked by a January wage growth number that exceeded expectations. Wage growth cooled somewhat in February and March, though it currently stands at 2.7% year over year, which remains toward the top of its post-financial crisis range. While faster wage growth is a good thing for workers, wages are one of the largest expenses for employers; and a strong move higher could lead companies to pass higher wage expenses on to consumers, potentially fueling inflation and causing the Federal Reserve (Fed) to become more aggressive with rate hikes. However, this domino effect hasn’t happened so far. The latest readings for the Producer Price Index (PPI) and the Consumer Price Index (CPI) were released last week, and both moved higher, but remain at manageable levels. Perhaps more importantly for the Fed, core personal consumption expenditures (PCE) — the Fed’s preferred inflation measure — remained well below the Fed’s 2% target in February. March data (which will be released on April 30), would need to move significantly higher to even approach the Fed’s 2% target [Figure 1].

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