A closely watched measure of inflation ticked up last month, the government said Friday in a report that spooked financial markets and bolsters the chances of the Federal Reserve beginning to raise interest rates for the first time in more than six years.
The consumer prices index advanced at a month over month rate of 0.2 percent in March. When the volatile food and energy sectors were stripped from the measurement, so-called core inflation also rose by 0.2 percent, according to the Bureau of Labor Statistics.
Usually rising prices are a concern, a signal that the economy could begin to overheat. But for the last several years, the bigger threat has been deflation, a steady and debilitating retreat in prices that sidelines consumption.
With the March rise, year-over-year core inflation advanced by 1.8 percent, nearing the Federal Reserve’s target of 2 percent.
A 2 percent rate of core inflation is what the Fed considers an economic sweet point, a rate that reflects an economy neither too hot nor too cold. The Fed has two missions, promoting full employment and stable prices, so on one front the central bank is meeting its goal.
In normal times, this would be seen as a positive for financial markets. Instead, the Dow Jones industrial average was down more than 260 points in Friday morning trading. That’s because meeting an inflation target increases the likelihood that the Fed will begin raising its benchmark interest rate in June or September. The federal funds rate influences the cost of borrowing across the economy, and it’s been anchored near zero since December 2008.
“The FOMC has said that it does not need inflation to be at 2 percent to raise the fed funds rate, but committee members would like inflation to be at least moving toward the target,” Stuart Hoffman, chief economist for the PNC Financial Services Group, said in an investor analysis. “The weak March employment report may have pushed out the date of the first rate increase in this tightening cycle, but with job growth set to rebound the conditions for a rate hike are falling into place.”
Hoffman and many other economists expect the first rate increase in more than six years to come in September.
Financial markets fret the day that the Federal Open Market Committee returns to higher interest rates because they don’t know the pace, or how consumers and businesses will adjust to higher borrowing costs. Higher interest rates also tend to raise the cost of borrowing for the U.S. government, which issues bonds to pay for bills already racked up, thus adding to the federal debt.
Within Friday’s numbers, food prices at home fell 0.5 percent and food prices away from home advanced 0.2 percent in March after several months of expansion.
“The big story is the end of food price surges,” said Michael Montgomery, a U.S. Economist with IHS Global Insight. “Food at home was 0.5 percent cheaper than in February with matching drops in both meats and dairy and almost three times that decline in fruits and vegetables.”