A measure the Federal Reserve is watching closely to measure inflation rose more-than-expected in January, suggesting the central bank still needs to do more to cut prices.
The price index of personal consumption spending excluding food and energy rose 0.6% for the month and 4.7% year-on-year, the Commerce Department reported on Friday. Wall Street had expected corresponding readings of 0.5% and 4.4%.
Including the volatile food and energy components, headline inflation rose by 0.6% and 5.4% respectively.
Markets fell after the report, with futures tied to the Dow Jones Industrial Average shedding more than 300 points.
Consumer spending also rose more-than-expected as prices rose, rising 1.8% for the month versus a 1.4% estimate. Personal income rose 1.4%, beating the 1.2% estimate. The personal savings rate also rose to 4.7%.
All the numbers are pointing to inflation accelerating at the start of the new year, putting the Fed in a position where it is likely to hike interest rates further. The central bank has hiked interest rates by 4.5 percentage points since March 2022, when inflation hit its highest level in about 41 years.
The Fed tracks the PCE readings more closely than some of the other inflation measures because the index adjusts to consumer spending habits, e.g. B. by replacing more expensive goods with cheaper ones. This gives a more accurate overview of the cost of living.
Policymakers tend to focus more on core inflation, believing it provides a better long-term view of inflation, although the Fed officially tracks headline PCE.
According to Friday’s report, much of January’s surge in inflation came from a 2% rise in energy prices. Food prices increased by 0.4%. Goods and services both rose 0.6%.
On an annual basis, food prices rose 11.1%, while energy prices rose 9.6%.
Cleveland Fed President Loretta Mester noted in a CNBC interview earlier Friday that some progress has been made but “the level of inflation is still too high.”
As a non-voting member of the rate-setting Federal Open Market Committee, Mester is pushing for more aggressive hikes. She said she was unsure if she would push for another half-point hike at the March FOMC meeting.
After Friday’s data, market prices for the probability of a half-point, or 50 basis point, hike next month rose to about 33%, according to data from CME Group.