Fed’s preferred inflation gauge picked up last month

The Federal Reserve’s preferred gauge of underlying inflation rose in January at the fastest pace in nearly a year, supporting policymakers’ patient approach to start cutting interest rates.

The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.4% from December, data out Thursday showed. From a year ago, it advanced 2.8%. Economists consider this to be a better gauge of underlying inflation than the overall index.

That metric rose 0.3% from the prior month and 2.4% from a year ago, according to the report from the Bureau of Economic Analysis.

Inflation-adjusted consumer spending dropped for the first time in five months after a robust holiday shopping season. Real disposable income, the main supporter of spending, was little changed.

Fed officials have repeatedly said they have yet to reach a level of confidence that inflation is sustainably cooling, and Thursday’s report likely reinforces that view in the near term. Policymakers insist it’s too soon to start cutting interest rates, and they’ll continue to monitor incoming data to guide policy.

The core PCE data, on a six-month annualized basis, registered at 2.5% in January, rebounding above the Fed’s 2% target after briefly trailing it in the prior two months.

This is the last PCE report Fed officials will have access to before they meet March 20-21. Chairman Jerome Powell and his colleagues have effectively ruled out a rate cut at that gathering, and investors are now leaning toward June as the most likely start time.