Inflation Cooled in March, but Signs of Stubborn Price Increases Persist

A new reading of the Federal Reserve preferred index shows a slowing in inflation, but prices continue to rise rapidly even after removing volatile fuel and food. This indicates that price pressures are still strong and it may be a long way back to normal.

The Personal Consumption Expenditures Index rose by 4.2 percent during the period from January to March. This is a significant drop from the 5.1 percent increase in the same period.

After removing food and fuel, the closely-watched "core" index remained nearly unchanged last month. This measure increased by 4.6 per cent over the past year, up from 4.7 per cent in the previous reading.

Data show that inflation has moderated, but the process is still bumpy and may take some time to complete. Fed officials raised interest rates dramatically over the last year in order to make borrowing money more expensive and to slow down demand. However, these moves have only gradually trickled through the economy to weigh down price increases.

On May 3, the central bank will meet to decide its next policy. It is widely expected that officials will raise rates by one quarter of a percentage point, to just over 5 percent. The markets will also be focused on the message they send for the future. In March, central bankers predicted that they may stop raising interest rates following their next adjustment. Incoming price and wage data as well as financial news may influence whether they feel comfortable putting a pause.

When deciding its next step, the Fed will need to consider the turmoil in banking. The system is still trembling from a series of notable bank failures that occurred in March. First Republic continues to struggle and its stock has plummeted in the last week. The industry's problems can affect the economy by slowing lending to businesses and consumers.

Already consumption is cooling. The report released on Friday showed that personal spending in March was unchanged compared to the previous month, following a 0.2 percent drop in February, adjusted for inflation.

In the months to come, with the slowdown in growth and the banking issues further impacting consumers, businesses may find that they can't charge as much for their products and services. Many companies have been able to increase prices.

"If inflation warrants that we need to increase our prices, we will do it," Brian Niccol said, Chipotle's chief executive, during a earnings call held this week. "I believe we have now shown we do have price power."