The latest data from the Commerce Department shows that inflation remained in check in January, reinforcing expectations that the Federal Reserve will maintain its current stance on interest rates. The personal consumption expenditures (PCE) price index, which serves as the Fed’s preferred inflation measure, rose 0.3% for the month and stood at an annual rate of 2.5%.
Core Inflation Holds Steady
Excluding volatile food and energy prices, core PCE rose 0.3% month-over-month, pushing the annual rate to 2.6%. This marks a decline from December’s revised 2.9% reading, providing evidence that inflationary pressures are easing. These figures align with expectations from Dow Jones analysts, reinforcing market sentiment that no immediate rate adjustments are on the horizon.
Personal Income Surges as Spending Declines
One of the key surprises in the report was personal income, which increased by 0.9%, significantly outpacing the 0.4% expectation. However, consumer spending did not follow suit, instead showing a 0.2% decline despite forecasts predicting a slight increase. Moreover, the personal savings rate rose to 4.6%, indicating that higher incomes are not immediately translating into increased expenditures.
Market Reactions & Fed Rate Expectations
Following the report’s release, stock futures traded higher while Treasury yields dipped, reflecting optimism that the Fed’s recent policy stance remains appropriate. Futures traders also adjusted their outlook for a potential June rate cut, with market-based probability estimates rising slightly above 70%, according to the CME Group’s FedWatch tool. Current projections have the Fed lowering interest rates twice this year, though the possibility of a third reduction is growing.
Inflation Breakdown: Goods vs. Services
The report also highlighted notable shifts in price movements across various categories. Goods prices climbed 0.5%, largely driven by a 0.9% rise in motor vehicles and parts and a 2% jump in gasoline prices. In contrast, services inflation remained subdued at 0.2%, with housing costs edging up by 0.3%.
Why the Fed Prefers PCE Over CPI
While many investors closely monitor the consumer price index (CPI), released earlier each month by the Bureau of Labor Statistics, the Fed places greater weight on the PCE index. This is due to its broader scope, adjustments for shifts in consumption habits, and reduced focus on housing costs. In January, the CPI reported an overall inflation rate of 3% and a core reading of 3.3%, slightly higher than the PCE measure.
As financial markets digest the latest inflation data, all eyes will remain on future reports to assess whether the downward trend continues, potentially paving the way for interest rate cuts later this year.
