March 2025 Inflation Update: Federal Reserve’s Key PCE Index Rises to 2.7%, Impacting Interest Rates

March 2024’s inflation data underscores that interest rate cuts are unlikely in the near term.

• The Personal Consumption Expenditures (PCE) inflation rate increased from 2.5% in February to 2.7% annually in March, indicating inflation is heating up.
• Elevated inflation may keep borrowing costs high, as the Federal Reserve continues to hold interest rates elevated to combat rising prices.
• This PCE increase aligns with earlier Consumer Price Index (CPI) reports showing similar inflation trends.

The latest government data confirms what many consumers have experienced firsthand: inflation remains uncomfortably high. The Bureau of Economic Analysis reported that the cost of living, measured by the PCE index, rose 2.7% over the past year as of March, surpassing economists’ expectations. This rise was primarily driven by higher food and energy prices.

Other Inflation Indicators Point to Rising Prices

Earlier this month, the Consumer Price Index also showed elevated inflation levels. However, the PCE inflation rate holds particular importance for monetary policy as it is closely monitored by Federal Reserve officials responsible for setting interest rates.

Economist Dan North of Allianz Trade remarked, "The trend is moving in the wrong direction." Both the CPI and PCE track consumer prices but differ in methodology, with PCE placing less weight on housing costs. The increase in PCE inflation signals that lower interest rates on mortgages and credit cards are unlikely soon.

Following a recent Gross Domestic Product (GDP) report revealing stronger-than-expected inflation for the quarter, some analysts feared a sharp inflation surge. However, January’s inflation rate was revised slightly upward from 2.4% to 2.5%, which may ease concerns about March’s inflation trajectory.

Core Inflation Remains Elevated

The Federal Reserve has kept the federal funds rate near its highest level since 2001 to tackle inflation, pushing borrowing costs higher across the board. Officials have indicated they will wait for clear evidence that inflation is steadily approaching their 2% target before lowering rates.

Friday’s report showed core inflation—excluding volatile food and energy prices—rose 2.8% year-over-year, exceeding forecasts of a decline to 2.7%. Economists focus on core inflation as a more stable gauge of underlying price pressures.

Consumer spending remains robust, supported by a 0.5% increase in personal income in March compared to February, reflecting strong labor market conditions. Spending grew 0.8%, matching February’s pace.

This consumer strength mirrors GDP data showing consumption as a key driver of economic growth, despite factors like rising imports that moderate headline growth figures.

Dan North commented on the GDP report, "While the surface numbers might seem rough, the underlying economic activity is still solid." This resilience reduces the Federal Reserve’s incentive to cut interest rates to stimulate growth.

Federal Reserve Likely to Maintain Rates Through Late 2024

The persistent inflation pressures combined with ongoing economic growth are expected to discourage Federal Reserve Chair Jerome Powell and policymakers from reducing interest rates before November 2024, according to North.

He noted, "From a growth perspective, the economy is performing well with strong consumer spending and labor market conditions, suggesting no immediate need for stimulus via rate cuts. On the inflation front, core inflation at 2.8% remains above the Fed’s 2% goal, indicating more time is needed before easing monetary policy."

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