The Fed’s Preferred Inflation Gauge Sped Back Up

Inflation remains stubbornly high in the US and unexpectedly rose in January, a new read of the Federal Reserve’s preferred index shows, underscoring the tough challenge central banks face. faced as they struggled to raise prices back to their normal pace.

A report on Friday showed that the Personal Consumption Spending price gauge rose 5.4% in January from a year earlier. That was above the 5% expected by economists, and up from 5.3% in December, which was revised higher.

Food and fuel prices aside, both of which jumped a lot, the price index rose 4.7% in the year to last month, also higher than expected in a Bloomberg survey of investors. economy.

These inflation figures are well above the Fed’s 2% price hike target. And the details of the report offer other reasons for concern: Monthly price increases have slowed significantly in recent months, but are now showing signs of accelerating again. The overall index rose 0.6 percent in the December-January period, the fastest rate of increase since last June.

The takeaway is that rapid inflation may have shown signs of slowing down early on, but it hasn’t been beaten yet. Fed officials raised interest rates at their fastest pace since the 1980s last year to cool consumer demand and force price hikes to moderate, and they have hinted in recent weeks that they may need to push borrowing costs higher than previously anticipated if prices rise and the economy doesn’t moderate as much as they expect in the coming months.

The report also gives an overview of spending — and it suggests that American consumers are still going strong.

Personal spending, which includes both goods and services, rose 1.8 percent in January. This compares with a slight decline of 0.1% in December and is higher than the 1.4% increase that economists had predicted. After adjusting for inflation, consumer spending rose last month.

Whether consumers will continue to spend is a key question as the Fed considers its next policy steps. If demand remains strong, that could make it difficult for the economy to slow down enough for businesses to charge less and inflation to fall completely back to normal.

Central banks raised interest rates from near zero this time in 2022 to more than 4.5% this month. Officials signaled in December that they may eventually need to raise rates above 5%, but those estimates have since climb a little higher. And key policymakers have been clear that if the economy doesn’t slow as expected, they will do more.

Higher interest rates weigh on the economy by making it more expensive for households to borrow to buy a car or home, and by making it more expensive for businesses to finance expansion. As those transactions stall, aftershocks will spill over into the economy, slowing not only the housing and auto markets, but also the labor market, retail spending and services more generally.

But the full effect of policy takes time to kick in, which makes it difficult for central banks to gauge in real time how much policy tightening is exactly right to slow the economy. and push up inflation.

Fed officials will analyze a range of data — on employment, spending and inflation — ahead of their next meeting on March 21-22.

They may also take cues from recent earnings calls, which suggest that the economy is starting to lose some of its heat, although it is not yet fully back to normal. The company’s profit margins have expanded significantly, but may start to level off as companies find it increasingly difficult to charge higher prices.

In 2022, “we observed a resilient customer that was less price sensitive than we expected in the face of persistent inflation,” said Ted Decker, chief executive officer of Home Depot. in a call with analysts this week. But “we did see some deceleration in certain products and categories, which was more pronounced in the fourth quarter.”