Key Fed Inflation Measure Increased in January

Credits: SchiffGold

The Federal Reserve’s closely watched inflation gauge, the personal consumption expenditures (PCE) index, saw a slight uptick in January, indicating that prices are holding above levels that would trigger an immediate cut in interest rates.

The PCE index rose by 0.3% for the month and 2.4% annually, meeting economists’ expectations.  The core PCE index, which excludes energy and food costs, increased by 0.4% in January and 2.8% year over year, in line with forecasts.

While the indices did show an increase, the fact that they matched economists’ expectations suggests that the market is unlikely to react significantly to the data. Personal income, on the other hand, saw a more significant increase than anticipated, rising by 1%, surpassing the forecast for a 0.3% gain.

Inflation Measures (Credits: Barron’s)

However, spending declined by 0.1%, contrary to the expected 0.2% gain. This discrepancy may indicate that Americans are saving money in anticipation of economic challenges ahead, but it also means they have additional funds to spend.

Initially down, stock futures improved after the PCE report’s release. Damian McIntyre, a portfolio manager at Federated Hermes, noted that the inflation increase was expected following earlier reports on the consumer price and producer price indices.

He emphasized that inflation gradually falls while economic growth remains robust, suggesting that higher interest rates may persist until summer.

In recent weeks, hotter-than-expected readings on consumer and producer prices had led to a reassessment of expectations for a Federal Reserve interest rate cut in March, with June now considered a more likely scenario for the first cut.

Despite the slight increase in inflation, various Fed officials, including Chairman Jerome Powell, have emphasized the need for “sustainable” evidence that inflation is heading back toward the 2% annual target before considering any policy changes.

While prices of goods have seen a drop, costs for services have been slower to decrease, with services representing a significant portion of economic activity.

In a separate development, the National Association of Realtors reported a 4.9% decline in pending home sales in January, well below estimates for a 1% increase. The decrease follows an 8.3% increase in December, and weather variations among geographic regions may have played a role.

Lawrence Yun, Chief Economist at NAR, noted that while the job market is solid and the country’s total wealth has reached a record high, consumers are sensitive to mortgage rate changes, impacting home sales.

The economic data and market movements are viewed cautiously, with some experts considering them as short-term noise rather than indicators of longer-term trends.

Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance, suggested that recent data should be ignored outside of its impact on very short-term market movements.

I'm Richard Rosales, I cover political news and ongoing US elections.