‘Core price’ spike stalls inflation fight
A key inflation gauge used by the Federal Reserve showed a shocking spike in core prices as shoppers increased their spending in January.
Core inflation — which includes clothes, transportation and housing costs, but strips out volatile food and energy prices — surged 0.6% from December to January, up from 0.4% the previous month, according to the Commerce Department’s latest Personal Consumption Expenditures index data released Friday.
The overall PCE index also rose 0.6% in January compared with December, up sharply from the 0.2% the previous month.
Both readings were higher than economists expected and the largest monthly PCE gain since June, marking a setback in the central bank’s effort to lower costs facing ordinary Americans.
“This is a bump in the road for the Fed,” Jeremy Schwartz, senior US economist at Credit Suisse Group, told The Wall Street Journal. “They have more work to do.”
Overall prices rose 5.4% in January compared to the same month one year ago, an increase from the
5.3% uptick in December. Core spiked 4.7% year-over-year.
The troubling numbers showed inflation is still lingering in the US economy and exacerbated fears among investors that the Fed will proceed with more interest rate hikes to cool prices.
Stocks plunged in response to the PCE inflation report.
While inflation has cooled in recent months from its peak of 9.1% in the middle of last year, it is still running much higher than the Fed’s target level of 2%.
“The inflation readings are still not where we need them to be,” Cleveland Fed President Loretta Mester told Bloomberg in a Friday interview.
Mester added that the PCE inflation data is “just consistent with the fact that the Fed needs to do a little more on our policy rate to make sure that inflation is moving back down.”
The report showed consumer spending rose by 1.8% in January after a slight decrease in December. Investors are pricing in a 67.1% probability that the Fed will implement another quarter-percentage-point hike in benchmark interest rates when officials next meet on March 22.
Roughly 33% of investors see the Fed enacting a larger half-point hike, according to CME Group data.
“This morning’s inflation data again came in higher than expected and it just reinforces the view that inflation is more persistent, and even though we now have much higher interest rates, it is much too soon for the Fed to say ‘mission accomplished,’ ” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.
Earlier this month, the more widely followed Consumer Price Index showed inflation surged 6.4% in January — more than economists expected.
Separately, the January jobs report showed the US economy added 517,000 jobs, while the unemployment rate fell to a 53-year low of just 3.4% despite the Fed’s policy-tightening campaign.
Overall prices rose 5.4% in January compared to a year ago.