SF Fed, Report: Fed Views – March 2023

Inflation

“While inflation has come down from peak readings recorded in June 2022, it remains well above the Federal Reserve’s 2% longer-run goal. We expect inflation to return gradually to 2%.”

“The consumption basket used to measure headline PCE inflation is comprised of both goods and services, with goods accounting for about 34% of the basket and services accounting for the remaining 66% … Given that services make up a large portion of the PCE consumption basket, returning inflation to 2% will require a significant drop in services inflation.”

Inflation Expectations

“Research has shown that households’ inflation expectations are sensitive to gasoline prices. U.S. gas prices increased in the months of January and February, which may explain the uptick in the February reading.”