Inflation measure hovering above 2%

Personal Consumption Expenditures reading is in line with expectations

The latest reading of the Federal Reserve's favorite inflation gauge was in line with economists' expectations, as price increases hovered above the central bank's target even after months of cooling.

The Personal Consumption Expenditures inflation measure climbed by 2.5% in February compared with a year earlier, according to a report released by the Commerce Department on Friday. Economists in a Bloomberg survey had expected an increase of that size, a tick higher than the rise of 2.4% in January.

The Fed officially targets that measure as it tries to achieve 2% annual inflation, so the latest reading, while widely anticipated, is evidence that inflation still has further to fall. The fresh reading is unlikely to shake Fed officials from the cautious and patient stance they have taken in recent months as they contemplate when and how much to cut interest rates this year.

The report's details underscored that inflation continues to moderate, even if the process is bumpy. A closely watched measure that strips out volatile food and fuel prices for a clearer reading of underlying inflation climbed 2.8%, in line with what economists had expected for that “core” index and slightly cooler than the previous month. And on a monthly basis, inflation cooled slightly.

The latest inflation readings are much milder than the highs reached in 2022, when overall inflation peaked at 7.1% and core at nearly 5.6% on an annual basis.

“It reinforces that inflation is on its way down,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, explaining that he thinks Friday's report will keep the Fed on track for a rate cut in June. “I don't think they're going to come out and change their tone; they don't really need to.”

The economy appears to be holding up even as inflation decelerates, which could give Fed officials confidence that they are managing to steer it to what is frequently called a soft landing. Consumers continued to spend at a robust clip last month, Friday's report showed, even after months of high interest rates. The economy's resilience is giving officials room to be patient without worrying too much that the United States is sliding into a recession.