U.S. prices rose in January on the back of a sharp rise in service costs, but the annual inflation rate was the slowest in three years, putting the Federal Reserve on the table for a mid-year interest rate cut.
Thursday’s Commerce Department report, which the Fed prioritizes over the CPI index, also showed that consumer spending last month was held back by lower spending on goods, including cars, furniture and other long-term household equipment. It shows.
Measures of inflation and consumer spending were in line with economists’ expectations.
But the timing of the Fed’s first rate cut remains uncertain, as companies likely raised prices earlier in the year, with service prices up 0.6% last month.
Services, including housing and health care, are central to the central bank’s efforts to combat inflation.
Policymakers say there is no rush to lower borrowing costs.
“Fed officials could still consider a first rate cut at their June meeting, as the economy remains on track and January’s inflation concerns are unlikely to persist,” said Christopher Rapkey, chief economist at FWDBONDS. “It’s expensive.” yoke.
The personal consumption expenditures (PCE) price index rose 0.3% last month, according to the Commerce Department’s Bureau of Economic Analysis.
Data for December was revised downward to show the PCE price index rose 0.1% instead of the previously reported 0.2% rise.
Commodity prices fell by 0.2% as energy costs fell by 1.4%, offsetting a 0.5% rise in food prices.
PCE inflation rose 2.4% in the 12 months to January.
The year-on-year increase was the smallest since February 2021, following a 2.6% increase in December.
The monthly data reflects increases in consumer and producer prices last month, which most economists attribute to higher prices at the start of the year.
Economists argue that the models used by the government to remove seasonal fluctuations from the data probably did not fully factor in price increases that will occur early in the year.
Most people don’t expect these price increases to be repeated in February.
Excluding the volatile food and energy components, the PCE price index rose 0.4% last month.
This was the biggest monthly increase since February last year and followed a downwardly revised 0.1% rise in December.
The so-called core PCE price index was previously reported to have risen 0.2% in December.
The core inflation rate rose 2.8% year-on-year in January, following a 2.9% rise in December and the first small increase since March 2021.
The Fed tracks the PCE price index toward a 2% inflation target. For inflation to return to target, long-term monthly inflation would need to be 0.2%.
Consumer spending cools down
PCE services inflation, which excludes energy and housing, accelerated by 0.6% last month, following a 0.3% rise in December.
The so-called supercore inflation rate rose 3.5% in January from a year earlier, after rising 3.2% in December.
Policymakers are looking to supercore inflation indicators to assess progress in the fight against inflation.
Government data on Wednesday showed the inflation rate for the fourth quarter was revised slightly upward. Financial markets pushed back expectations for a Fed rate cut from May to June.
The central bank will raise policy interest rates by 525 basis points from March 2022 onwards, to the current range of 5.25-5.50%.
Last month’s acceleration in inflation occurred despite a slowdown in consumer spending.
Personal consumption, which accounts for more than two-thirds of U.S. economic activity, rose 0.2%, following a 0.7% increase in December.
Spending remains supported by the tight labor market, and wage growth remains high.
Personal income rose 1.0% last month, boosted by government benefits, including a 3.2% cost-of-living adjustment for Social Security recipients.
Wages increased by 0.4%.
In a separate report released Thursday by the Labor Department, the number of first-time claims for state unemployment benefits rose by 13,000 for the week ending Feb. 24, to a seasonally adjusted 215,000.
Economists had expected 210,000 claims in the past week.
Despite high-profile job cuts at the beginning of the year, the number of applications remains at historically low levels.
