PCE inflation gauge matches expectations and provides relief to FREF
The latest reading of the Federal Reserve Priority Inflation Gauge shows prices rose monthly but fell year-on-year.
The “core” personal consumption expenditure (PCE) index, which removes food and energy costs, rose 0.3% from the previous month in January, but the rise was in line with expectations. Prices rose 0.2% in December.
Core prices rose 2.6% year on year, and this was in line with expectations. This was down from an annual increase of 2.9% in December.
The data shows a more sluggish pace of price increases in January than a measure separate from the Consumer Price Index (CPI), which showed the biggest rise in core prices since April 2023.
PCE data may provide more comfort to Fed officials after CPI data in January has led many policymakers to question whether hotter reading than expected is a road rise or a new trend.
Officials are currently looking for a clear trendline that shows progress in bringing inflation back to its 2% target to digest the effects of new economic policies from the Trump administration into trade, taxes and immigration.
Friday’s PCE Inflation Reading is something that the last Fed officials get before convening for the next policy meeting on March 18-19.
After cutting 100 basis points over the course of three consecutive meetings at the end of 2024, the central bank is almost certain to stabilize the rate at the second consecutive meeting this year.
The market has not priced at any rating until June to digest this week’s survey, which showed short-term inflation expectations are rising sharply while consumer confidence is declining.
“The 2.6% annual core inflation rate is still too high for the Fed’s preference. We believe interest rate cuts are off the table this year as inflation tariff measures are baffling.”
“The central bank has “inflation has cooled down in January, but we are concerned about price outlook,” said Bill Adams, chief economist at Comerica Bank.
Richmond Fed President Tom Birkin said Tuesday he hopes to keep interest rates “conservatively restrictive” and return to the central bank’s 2% target until he gains more credibility.
Kansas City Fed President Jeff Schmidt said Thursday that he has become more cautious about continuing to fall as inflation expectations skyrocket.