U.S. inflation barely rose in March as consumer spending remained tepid, making it less likely that the Federal Reserve will be able to follow through on its projected two interest rate increases this year.
The tame inflation backdrop was reinforced by another government report on Friday showing a modest advance in labor costs in the first quarter.
Other data showing a drop in consumer sentiment in April, the fourth consecutive monthly decline, and a softening in factory activity in the Midwest further supported the case for a single rate hike in 2016.
The data suggest, at least for now, that the economy will probably not rebound strongly in the second quarter after growth slowed to a crawl in the first three months of the year.
“The tone of these reports was quite weak, playing into the current narrative of weakening growth and the subdued inflationary momentum,” said Millan Mulraine, deputy chief economist at TD Securities in New York. “We are expecting only one rate hike this year, with that move coming in September.”
The Commerce Department reported that the personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, edged up 0.1 percent last month after increasing 0.2 percent in February.
The so-called core PCE, which is the U.S. central bank’s preferred inflation measure and is running below its 2 percent target, rose 1.6 percent in the 12 months through March, after advancing 1.7 percent in February.
Following its latest policy meeting this week, the Fed said it was continuing to “closely” monitor inflation. It left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further.
The central bank hiked rates in December for the first time in nearly a decade and Fed policymakers earlier this year forecast two more rate hikes for 2016. But market-based measures of Fed policy expectations mostly lean to one hike this year.
The dollar fell to an eight-month low against a basket of currencies on the data. U.S. stocks tumbled and prices for U.S. government bonds weakened marginally.