Consumer prices rose slightly in March as annual inflation plunged

The Federal Reserve’s preferred measure of inflation fell to a 4.2 percent annual increase in March as price growth throughout the economy continues to drop.

The personal consumption expenditures (PCE) price index rose 0.1 percent on the month, the Commerce Department reported, far less than the 0.4 percent projected by economists.
The “core” PCE, which excludes food and energy costs, rose just 0.3 percent, the same as in February.

The annual inflation rate fell nearly a full percentage point in March. Prices were up 5.1 percent annually in February, up 5.4 percent in January and 5.3 percent in December.

The PCE price index has been falling for several months now off an annual increase of 6.9 percent last June. Inflation has been cooling as the Fed continues an intensive program of interest rate increases and quantitative tightening that has been slowing the economy toward a potential recession.

Spending flatlines in March

Friday’s data release shows growth in consumer spending flatlined in March and has been decreasing since the beginning of the year. This could mean consumers are coming close to the end of their rope after prices outpaced wages in the current inflationary cycle for all but the lowest-earning workers.

Consumer spending in March was flat from February on both an adjusted and unadjusted basis, the Commerce Department reported.

“The consumer engine is sputtering,” EY-Parthenon chief economist Gregory Daco wrote in an analysis.

“The cutbacks in spending were broad-based across most goods and services categories with solid spending on gasoline, utilities and health care preventing a larger drop in the headline figure.”

On the bright side, personal incomes are still growing — up 0.3 percent in March, the same as in February. Adjusted disposable income rose slightly to 0.3 percent growth in March from 0.2 percent in February.

Bank failures loom over the economy

Declining spending could add to the likelihood of a recession.

U.S. gross domestic product grew at an annualized rate of just 1.1 percent in the first quarter, according to Commerce Department data released Thursday, a notable slowdown from the 2.6 percent growth rate in the fourth quarter of 2022.

Spending has declined thanks to a combination of stubborn inflation and higher borrowing costs associated with a string of bank failures in March and Fed rate hikes.

The failures of Silicon Valley Bank (SVB) and Signature Bank in March were met with a swift response by the Fed and the Federal Deposit Insurance Corporation for fear of a wider financial contagion, though banking authorities have said this had more to do with fears of a general bank run than with the particular importance of SVB and Signature themselves.

“I voted for these actions, not because SVB and Signature are systemically important on their own, but to stem the emerging crisis of confidence which could have led to additional bank runs with significant adverse effects on financial markets and the broader economy,” Fed board member Christopher Waller remarked in Texas earlier this month.

Lower profitability in the banking system can be associated with lower lending levels. Lending is important for all kinds of businesses and households, and it can have a serious impact on production levels and the strength of the economy.

There has been some discussion at the international level about whether international banking standards need to be changed in light of the SVB and Signature collapses.

“It … seems prudent to ask if the standard measure of risk-weighted capital adequacy in the Basel requirements should be changed,” former International Monetary Fund banker Anthony Elson wrote in a blog post for the Bretton Woods Committee in March.

Updated at 10 a.m.