Inflation reaches key threshold for Fed rate hikes

Inflation for the first time in several years has increased to the Federal Reserve’s annual target, the Commerce Department reported Monday, reaching a key threshold for the future of U.S. interest rates.

The personal consumption expenditures (PCE) index, the Fed’s inflation barometer, increased 2 percent in the 12-month period ending in March, according to data released Monday.

Consumer prices stayed flat in the month of March itself, while consumer prices minus volatile food and energy rose 0.2 percent.

Consumer spending on whole rose 0.4 percent in March after decreasing 0.2 percent in February.

Personal income increased 0.3 percent in March, the same rate from February. Wages and salaries increased 0.2 percent in March after increasing 0.4 percent in February.

With inflation reaching the Fed’s preferred level in March, the bank could increase interest rates further than its current projections.

The Fed has marked 2 percent inflation as the right equilibrium for a growing but stable economy. Policymakers and analysts have been closely watching how quickly inflation will rise as the Fed aims to strike a careful balance on interest rates.

Despite record-low unemployment and steady economic growth, inflation had lagged behind the Fed’s target as the bank looked to raise interest rates back toward historically neutral levels.

The Fed is aiming to raise interest rates quick enough to prevent inflation from spiking, but slow enough to allow the economy to grow at a stable level.

The bank raised interest rates to a 1.5 percent to 1.75 percent target range in March and is expecting two more hikes in 2018. But a growing number of Fed officials and analysts say further hikes could be necessary to curb rising inflation.

Analysts are expecting strong U.S. growth throughout 2018, spurred by increasing federal spending and a rush of economic activity spurred by the 2017 tax cuts. But some have feared that the combination of higher spending with record-low unemployment could overheat the economy and spur massive price increases.