Key Fed inflation gauge, consumer spending rise in February

The personal consumption expenditures price index rose 2.5% last month, in line with expectations. On a monthly basis, prices rose 0.3%, slightly below economists' estimates.

A key inflation gauge watched closely by the Federal Reserve climbed on an annual basis in February.

The Commerce Department's personal consumption expenditures price index (PCE) headline figure rose 2.5% last month, in line with expectations. On a monthly basis, prices rose 0.3%, slightly below the estimate of economists surveyed by LSEG.

Excluding food and energy, so-called core PCE prices rose 2.8% annually in February and 0.3% from the prior month. Both figures were in line with expectations, and the year-over-year figure is slightly lower than January's reading of 2.9%. The January monthly core PCE reading was revised upward from 0.4% to 0.5%. For inflation to return to the Fed's 2% year-over-year target, monthly inflation readings over 0.2% are necessary over time to lower the headline rate.

Consumer spending spiked 0.8% last month, up from the 0.2% increase in January. That figure came in higher than the 0.5% increase that the LSEG economists' survey projected.

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The report found that prices for goods rose by 0.5% from January while prices for services ticked up by 0.3%. On a monthly basis, food prices increased 0.1% and energy prices rose by 2.3%.

Compared to the same month a year ago, prices for services increased 3.8% while goods decreased by 0.2%. Food prices were up 1.3% and energy prices declined by 2.3% from last year.

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Federal Reserve officials held a policy meeting last week and left the central bank's federal funds rate unchanged at a range of 5.25% to 5.50%. The Fed has raised the benchmark rate – which influences interest rates for mortgages, loans and credit cards – by 525 basis points since March 2022.

Inflation hasn't subsided as quickly as policymakers had expected, which prompted the Fed's decision to leave interest rates unchanged. 

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Stubborn inflation has lowered expectations that there may be as many as six interest rate cuts this year, although a smaller number of cuts are still projected.

Policymakers anticipate three rate cuts this year, according to the CME's FedWatch tool. Financial markets expect the first rate cut to occur in June, although Fed officials haven't provided a timeline and say they'll continue to monitor economic data.

Christopher Waller, a member of the Federal Reserve Board of Governors, said Wednesday that "there is no rush to cut the policy rate" right now but didn't rule out lowering the benchmark rate later this year.

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FOX Business' Suzanne O'Halloran and Reuters contributed to this report.