Surge adds pressure to Fed
January data suggests the U.S. economy remains extremely resilient
There was a moment late last year when everything seemed to be going according to the Federal Reserve’s plan: Inflation was slowing, consumers were pulling back and the overheated economy was gently cooling down.
But a spate of fresh data, including figures released Friday, make it clear that the road ahead is likely to be bumpier and more treacherous than expected.
Inflation remains stubbornly elevated and unexpectedly picked up in January, a fresh reading of the Fed’s preferred index showed, underscoring the daunting challenge facing central bankers as they try to wrestle price increases back to a normal pace.
After six months of more or less consistently cooling down, the personal consumption expenditures price measure climbed 5.4% in January from a year earlier, an unexpected pickup from 5.3% the prior month and substantially more than the 5% economists had expected.
Even after stripping out food and fuel prices, both of which jump around a lot, the price index climbed 4.7% in the year through last month — also a pickup, and more than expected in a Bloomberg survey of economists.
Those inflation readings are well above the Fed’s goal of 2% annual price increases. The report’s details offered other reasons to worry. The previouslyreported slowdown in December inflation figures, which had given economists hope, looked less pronounced after revisions. While price increases had been consistently slowing on a monthly basis, they are now showing signs of speeding back up.
Stocks slumped to their worst week of the year with the S&P 500 down 1.1% Friday as investors digested the report and what it portends for the Fed, which has been raising rates aggressively since last year. Financial markets have come under sustained pressure in recent weeks as investors have recalibrated their expectations for how long inflation could remain high and how high interest rates could go as a result.
The inflation figures are just the latest evidence that neither price increases nor the broader economy are cooling as much as expected. Hiring has remained abnormally robust and figures Friday showed that people continue to spend money rapidly on goods and services. Given that, Fed officials may come to believe that they need to do more to cool the economy — in particular, raise interest rates higher than the 5% to 5.25% range they had previously expected.
“In a nutshell, it means the job is not done — in fact, it is far from done, because inflation is much too high,” said Gennadiy Goldberg, a rates analyst at TD Securities. “The economy is still strong, and consumers are still spending money.”
Fed policymakers have raised rates at the fastest pace since the 1980s over the past year, lifting them from near zero at this time in 2022 to more than 4.5%. The goal was to slow consumer demand and force companies to charge less, ultimately wrestling inflation lower.