Core Inflation Near Fed Target, Consumer Spending Rises As Expected

Core inflation is suddenly very near the Federal Reserve's target, at a year-on-year 1.9 percent in March for a 3 tenths gain for this which is the most closely watched of all inflation indicators. But the gain reflects an easy comparison with March last year when a plunge in wireless service prices pulled readings down. The monthly gain for the core relative to February this year is only a modest 0.2 percent.

Turning to other readings in the report, consumer spending rose an as-expected 0.4 percent in the month though February is revised 2 tenths lower to no change. Spending on durables jumped 0.8 percent, reflecting March's big gain in auto sales, while spending on services, by far the largest consumer category, rose an outsized 0.6 percent. But spending on non-durables fell 0.4 percent for a second straight decline.

Income data are subdued in today's report, up only 0.3 percent on the month, which is just below Econoday's consensus, with the wages & salaries component rising only 0.2 percent and well down from 0.4 percent in February and 0.5 percent gains in the prior three months. The savings rate is also soft, down 2 tenths to 3.1 percent to suggest that March's rise in consumer spending came at the expense, at least to a degree, of savings.

The year-on-year core reading for this report is a shot across the bow for this week's FOMC meeting where no action is expected. And though it is fed by an easy comparison and may fall back in next month's report, the result will liven up the inflation debate especially at a time when capacity stress and import tariffs are emerging price factors. As for spending, the data for March, though solid, are offset by the February downgrade and follow only a 0.2 percent gain in January, making for a subdued quarter as evidenced by last week's GDP report where inflation-adjusted spending managed only a 1.1 percent annualized growth rate.