Inflation rose as expected in January, according to a key indicator the Federal Reserve uses in its rate-cutting deliberations.
The price index of personal consumption expenditures, excluding food and energy costs, rose 0.4% for the month and 2.8% from a year earlier, in line with Dow Jones consensus estimates. Monthly growth was just 0.1% in December and 2.9% year-on-year.
Total PCE, including the volatile food and energy categories, increased 0.3% monthly and 2.4% on a 12-month basis, compared to respective estimates of 0.3% and 2.4%, respectively. according to figures released Thursday by the Commerce Department’s Bureau of Economic Analysis. The respective December figures were 0.1% and 2.6%, respectively.
The moves came amid an unexpected rise in personal income, which rose 1%, well above the 0.3% forecast. Spending fell 0.1% from the estimate, representing an increase of 0.2%.
January’s price increases reflected a continued shift toward services over goods as the economy normalizes following disruptions caused by the Covid pandemic.
Prices of services rose 0.6% month-on-month, while prices of goods fell 0.2%; On a 12-month basis, services rose 3.9% and goods fell 0.5%. Within these categories, food prices increased by 0.5%, offset by a 1.4% decrease in energy prices. Year-over-year, food prices rose 1.4% while energy fell 4.9%.
Both the benchmark and core metrics remain above the Fed’s 2% annual inflation target, although the core annualized reading was the lowest since February 2021. While the Fed officially uses the benchmark metric, policymakers tend to pay more attention to it as a better indication of where long-term trends are headed.
CHICAGO, ILLINOIS – FEBRUARY 13: Customers shop at a grocery store on February 13, 2024 in Chicago, Illinois. Food prices have risen 0.4% since December and 1.2% last year, the slowest annual increase since June 2021. (Photo by Scott Olson/Getty Images)
Scott Olson | Getty Images News | Getty Images
“In total, [the report] met expectations, and some of the market’s worst fears were not met,” said Stephen Gallagher, chief U.S. economist at Société Générale. “The key is that we don’t see the broad nature of the increases that we were more afraid of.”
Wall Street barely reacted to the news: stock market futures rose slightly and Treasury yields fell slightly. Futures markets, where traders bet on the direction of interest rates, also showed little movement as prices aligned with the Fed’s first rate cut in June.
Thursday’s BEA report also showed that consumers continue to dip into savings as prices remain high. The personal savings rate was 3.8% month-on-month, slightly higher than in December but a full percentage point lower than in June 2023.
In other business news, a Labor Department report showed companies are still reluctant to lay off workers.
Initial jobless claims totaled 215,000 in the week ended Feb. 24, up 13,000 from the previous period and above the Dow Jones estimate of 210,000, but still broadly in line with recent trends. However, ongoing claims, which are a week behind, rose to just over 1.9 million, up 45,000 and more than the FactSet estimate of 1.88 million.
The reports come as central bank officials consider the future of monetary policy after 11 interest rate hikes totaling 5.25 percentage points. The rate hikes came from March 2022 to July 2023 as the Fed battled inflation, which peaked at a more than 40-year high in mid-2022.
Officials have said in recent days that they expect to reverse the increases sometime this year. However, the timing and extent of monetary easing is uncertain as recent data suggests inflation could be more stubborn than expected.
“The hot inflation data for January adds uncertainty and pushes back interest rate cut expectations,” said David Alcaly, senior macroeconomic strategist at Lazard. “But the odds remain good that this is a burst of speed and that while there may be additional short-term fluctuations in the market narrative, ultimately how deep a rate cutting cycle goes over time will be more important than when it begins .”
January’s consumer price index data raised fears of continued high inflation, although many economists said the rise was influenced by seasonal factors and the shelter-in-place increase was unlikely to continue.
While the CPI is used as an input to the PCE, Fed officials are more focused on the latter because it takes into account consumers’ substitutions of goods and services as prices fall. While CPI is considered a simpler price measure, PCE is considered more representative of what people actually buy.
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2024-02-29 15:12:26
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