Rising energy costs have pushed the Federal Reserve's preferred core inflation measure higher for March, highlighting the growing divisions within the central bank regarding its future interest rate reduction strategy. Data released by the Commerce Department on Thursday showed the Personal Consumption Expenditures (PCE) price index increased by 0.7% month-over-month in March, following a 0.4% rise in February. The core PCE price index, which excludes the volatile food and energy categories, saw a more moderate increase of 0.3%.

Over the past year, the PCE price index has risen by 3.5%, significantly above the Fed's 2% annual inflation target. The core PCE inflation rate stood at 3.2% year-over-year.

Wall Street was not surprised by these figures, as industry economists can accurately forecast PCE values using various public data. However, the data clearly indicates that Fed policymakers are becoming increasingly cautious about restarting the rate-cutting cycle that began in 2024 and is currently on hold.

Since 2021, PCE inflation has consistently exceeded the Fed's target, driven initially by post-pandemic price surges, followed by the impact of large-scale tariff increases last year, and now renewed inflationary pressure from the situation in Iran. Fed officials had been optimistic at the beginning of 2026 that price increases would gradually moderate, but the disruption to crude oil markets caused by the halt in shipping through the Strait of Hormuz has significantly disrupted the disinflation process.

The interest rate meeting held this past Wednesday was notably contentious, marking the final meeting of Fed Chair Jerome Powell's eight-year term. While the consensus was to keep rates unchanged, there was a clear divergence in views on the future policy path. Over the past two years, the Fed has generally signaled a bias towards rate cuts; although Wednesday's decision retained signals for accommodative policy, three officials dissented, arguing that both future rate cuts and hikes remain possible.

The Commerce Department's Thursday report also showed a significant rebound in U.S. consumer spending last month, driven by increased gasoline consumption amid higher oil prices. Consumer spending rose 0.9% month-over-month in March, meeting market expectations, with spending on gasoline and other energy goods surging 20%. Personal income increased by 0.6% month-over-month, surpassing the market forecast of 0.3%.