Fed’s preferred inflation gauge accelerates, adding more pressure for more rate hikes

The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a yearend slump, adding pressure on policymakers to keep ratcheting up interest rates.

The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.

U.S. stock futures fell and Treasury yields rose as traders firmed up bets that the Fed will raise interest rates by a quarter-point at each of the next three meetings. Investors also expect a higher terminal fed funds rate.

The resilient spending and stubborn inflation suggest that the Fed’s path to taming prices and demand will be bumpier and longer than data for late 2022 had previously indicated. While that could bolster policymakers’ resolve to raise borrowing costs higher than anticipated and keep them there for longer, it may increase risks of a recession.

The PCE price index increased 0.6% from a month earlier, the most since June, Commerce Department data showed Friday. Excluding food and energy, the core PCE price index also climbed 0.6%. Both advances exceeded projections.

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The latest figures underscore the risks of persistently high inflation. Much of the easing that was celebrated at the end of last year has largely been erased after revisions and the acceleration in January.

Furthermore, resilient consumer spending paired with the exceptional strength of the labor market will make it more difficult for the Fed to get inflation to its 2% goal.

The January increase in personal spending reflected a pickup in outlays for goods and services, including motor vehicles as well as food services and accommodation.

With the unemployment rate at its lowest level in more than 53 years, intense competition for a limited supply of workers has kept upward pressure on pay growth. Higher wages paired with excess savings have underpinned consumers and allowed them to keep spending for a variety of goods and services despite those rapid price increases.