Fed’s Preferred Inflation Metric Rises Mildly, Spending Picks Up

Key Takeaways

*

• Personal Consumption Expenditures (PCE) index rose 0.6% in January, driven by higher energy and food costs.
• Excluding food and energy, the core PCE index increased by 0.4%, meeting expectations.
• Consumer spending rebounded in January, boosted by strong growth in services.

Inflation Remains Elevated but Moderating

The Federal Reserve's preferred inflation measure, the PCE index, rose 0.6% in January, slightly above market forecasts of 0.5%. This marks the sixth consecutive month of moderation in inflation, but it remains well above the Fed's target of 2%.

The increase in the PCE index was primarily driven by higher energy and food costs. Gasoline prices jumped 2.4% in January, while food prices rose 0.5%. However, excluding these volatile components, the core PCE index rose by a more moderate 0.4%, in line with expectations.

Consumer Spending Rebounds

Consumer spending rebounded in January after two months of decline. Personal consumption expenditures increased by 1.8%, driven by strong growth in services. Spending on healthcare, food services, and entertainment all showed notable gains. Goods spending also rose, but at a slower pace than services.

The increase in consumer spending suggests that the economy is still resilient despite headwinds such as high inflation and rising interest rates. However, it is important to note that consumer spending is often volatile and can be influenced by factors such as weather and seasonal patterns.

Implications for Monetary Policy

The latest inflation and spending data is likely to reinforce the Fed's commitment to further interest rate hikes. While inflation is moderating, it remains elevated and well above the Fed's target. The strong rebound in consumer spending also indicates that the economy is still overheating, which could put upward pressure on inflation.

The Fed is expected to continue raising interest rates gradually in the coming months in an effort to bring inflation back down to its target. However, the Fed will also be cautious not to raise rates too quickly, which could lead to a recession.