Annual inflation slowed and wage growth remained weak in March, in two datapoints that will reassure Federal Reserve officials that their decision not to raise interest rates was warranted, but are also signs of weakness in the economy.
The Bureau of Economic Analysis reported Friday morning that prices were up 0.1 percent in March, according to its Personal Consumption Expenditures Index, the inflation index favored by the Fed. That pushed the annual rate of inflation down from 1 percent to 0.8 percent.
Falling inflation is the opposite of what the Fed wants to see. The central bank has targeted 2 percent inflation, and in a statement Wednesday the Fed said it will “carefully monitor actual and expected progress toward its inflation goal” in determining whether and when to resume raising interest rates.
Setting aside volatile energy and food prices, “core” inflation edged down from 1.7 percent to 1.6 percent, another step in the wrong direction.
Friday’s news was largely anticipated by Fed chairwoman Janet Yellen, who said at a March press conference that she expected a temporary dip in core inflation, based on her reading of the data. She and other officials, however, have explained that they anticipate prices rising faster with more job growth and economic growth in the U.S.
On that score, however, there was only mixed news Friday.
The Bureau of Labor Statistics reported that wages and salaries for private-sector workers were up only 2 percent on the year through March, in line with the subdued growth of the past few years. The pace of wage growth was down a tenth of a percentage point from the previous quarter, and down from 2.8 percent a year ago, according to the Bureau’s Employment Cost Index.
Faster-rising wages, Yellen has said, would be a key indication that the economy is nearing full capacity, and that the Fed must raise interest rates and tighten monetary policy faster to avoid higher inflation.
Without concrete signs of faster wage growth or higher inflation, however, the Fed has less of a basis for raising its interest target at its next meeting in June, despite recent resilient job growth in the U.S.
