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Inflation edges up in February, leaving Fed on track to raise rates

The Federal Reserve's preferred inflation gauge rose slightly in February and is expected to continue its rise in coming months, keeping the central bank's plan to gradually increase interest rates on track, analysts say.

The core personal consumption expenditures price index, which excludes food and energy, rose 1.6% year over year in February, the latest figures from the Bureau of Economic Analysis show. That is up from the 1.5% level that core PCE had been stuck at for the past four months, though it remains below the Fed's 2% goal. The overall PCE index edged up to 1.8% year over year in February, up from 1.7% in January.

Analysts expect inflation gains will accelerate as a sharp decline in cellphone plan prices from March 2017 drops out of the annual readings.

Inflation figures are "at a turning point," Leslie Preston, senior economist at TD Economics, wrote in a note to clients. "We expect that upward movement in inflation will continue over the medium term, underpinning further rate hikes by the Federal Reserve."

The Federal Open Market Committee raised its benchmark federal funds rate this month and signaled that it would do so three times in total this year, though some analysts expect four rate hikes. Fed Chairman Jerome Powell also expressed confidence that inflation would rise to the Fed's 2% goal but only gradually, saying he does not see evidence that "we're on the cusp of an acceleration of inflation."

Michael Gapen, Barclays' chief U.S. economist, said transitory factors that have been holding inflation down should fade in the coming months. In a note to clients he also mentioned other factors that may boost inflation, including rising oil prices, the effects of tax cuts and the tariffs that President Donald Trump's administration is pursuing.

Others expect a more substantial uptick. Stephen Stanley, chief economist at Amherst Pierpont Securities, wrote in a research note that he expects inflation to "accelerate sharply," likely exceeding 2% this summer and "probably moving well above 2% by late this year." A three-month annualized figure, he added, hit 2.75% in February, the highest reading since 2007.

"Things have certainly turned in a hurry," he wrote.

On a monthly basis, both the headline PCE index and the core PCE index grew by 0.2% in February, according to the Bureau of Economic Analysis.

Paul Ashworth, chief North American economist at Capital Economics, told clients there is "now a good chance" that the Fed's preferred annual gauge will reach 2% in March. There is a chance the inflation gains may be temporary, Ashworth wrote, but "the bigger risk is that it continues to climb further above 2%."

"Our long-held forecast that the Fed would hike four times this year, as core inflation rebounded, is beginning to look a little dovish," he wrote.