Key inflation index eases, but prices still above goal

Yearly data solid as Fed eyes cost shifts, considers rate cut

A measure of inflation closely watched by the Federal Reserve continued to cool on an annual basis in January, the latest sign that price increases are coming back under control even as the economy continues to chug along.

The personal consumption expenditures price index climbed 2.4% last month compared with a year earlier. That was in line with what economists had forecast and down from the 2.6% December reading.

After stripping out food and fuel costs, which can move around from month to month, a “core” price index climbed 2.8% from January 2023. That followed a 2.9% December reading.

Still, the closely watched core measure climbed more quickly on a monthly basis: It picked up 0.4%, compared with a 0.1% December pace. That was the fastest pace of increase since January 2023, and it came as service prices continued to climb at a rapid clip.

Taken as a whole, the numbers provide further evidence that while inflation continues to come down, the path back to normal could remain at least somewhat bumpy.

Fed officials aim for 2% price increases, so today’s inflation rate remains elevated. Still, it is much lower than this measure’s roughly 7% peak in 2022. In their December economic projections, central bankers predicted that inflation would cool to 2.4% by the end of the year.

“They’re probably not going to get too worked up over just one point,” said Omair Sharif, founder at Inflation Insights, but he noted that policymakers were likely to pay attention to the firm monthly inflation reading. “This is obviously going in the wrong direction.”

Policymakers meet next March 19 and 20, and the latest inflation data could factor in to how they are thinking about the economy. Policymakers are likely to take this report together with a more up-to-date inflation measure, the consumer price index, which is set for release March 12.

Officials have recently been able to dial back their campaign to slow the economy because price increases have been swiftly cooling. Fed officials have already raised interest rates to a range of 5.25% to 5.5%, up sharply from near zero as recently as early 2022. But they skipped a final rate increase that they previously predicted in 2023 and have signaled that they could cut interest rates several times this year.

Investors are now wondering how soon those rate cuts could come and how quickly they will proceed. But Fed officials have been taking a wait-and-see approach, worried about declaring victory before inflation is firmly stamped out.

Thursday’s report also included a fresh reading on consumer spending and suggested that consumers spent less in inflation-adjusted terms last month.

“We have expected consumers to rein in their spending this year after drawing down the pandemic-related savings,” Kathy Bostjancic, the chief economist at Nationwide, wrote in a note after the report.