The Federal Reserve’s preferred measure of inflation rose unexpectedly sharply last month, a worrying sign for consumers that sent Wall Street’s major stock indexes to their worst weekly losses yet this year.
The consumer spending price index rose at an annual rate of 5.4% in January, up from a rate of 5.3% the previous month, the Commerce Department said on Friday.
On a monthly basis, PCE prices are up 0.6% since December, the largest monthly increase since June, when prices rose at their fastest pace in 40 years.
The news sent stocks plummeting, with the Dow Jones Industrial Average ending the day down 337 points, down 1% for the session and down 2.6% on the week.
It was also the Dow’s fourth straight weekly decline, its longest losing streak in nearly 10 months. The S&P 500 and Nasdaq Composite were also down 2.7% and 3.3%, respectively, for the week.
The personal consumption expenditure index rose 5.4% on an annualized basis in January, up from 5.3% in the previous month, a worrying sign for inflation
The Dow Jones Industrial Average ended the day down 337 points, down 1% for the session and down 2.6% on the week
Excluding volatile food and energy prices, so-called core PCE inflation has also risen 0.6% since December, up from a 0.4% rise in the previous month.
And on a year-over-year basis, core inflation rose 4.7% in January, versus a 4.6% yoy increase in December.
It’s a worrying signal that the Fed’s aggressive rate hikes are having little impact on inflation. Core PCE is the benchmark for the central bank’s 2% target interest rate and should be the number falling fastest in response to higher interest rates.
The PCE is an alternative measure to the better-known CPI, which has risen 6.4% annually over the past month — better than expected, though still a slight month-on-month decline.
The latest report “is another indication that the momentum of inflation and price pressures is still with us,” Cleveland Fed President Loretta Mester told Portal on the sidelines of a conference in New York.
“It will take more effort on the part of the Fed to bring inflation to 2% on this sustained downward path,” added the Fed policymaker.
The Fed has spent the past year aggressively raising its benchmark federal funds rate in an attempt to curb inflation by raising the cost of borrowing for businesses and families.
The goal is to cool the economy without plunging it into recession, a delicate balance.
A trader works on the floor of the New York Stock Exchange in New York on Friday as stocks closed lower, capping their worst week of 2023
The S&P 500 was also down 2.7% this week
The Nasdaq Composite lost 3.3% this week
The Fed raised interest rates last March from near zero to a current range of 4.5% to 4.75%, the highest level since 2008.
Markets had increasingly forecast three more quarter-point hikes this year before the Fed settled in the upper 5.5% range.
Pricing is also now showing about a 40% chance of an even higher breakpoint for this price, up from about 30% before the PCE data was released.
And traders largely erased their persistent bets on Fed rate cuts later in the year, pricing in a 5.26% Fed interest rate year-end.
“There are inflationary pressures in the economy, the level of inflation is still too high and it will take more on the monetary policy side to bring inflation down,” Mester said.
Economic data over the past few weeks has been generally stronger than expected, with job growth still robust and wage increases ahead of what Fed Governor Phillip Jefferson said on Friday consistent with a timely return to 2% inflation.
Employers added a sizzling 517,000 jobs in January and the unemployment rate fell to 3.4%, the lowest since 1969.
A strong labor market can fuel inflation by putting upward pressure on wages, which firms then pass on to consumers in the form of higher prices.
The PCE is an alternative measure to the better-known consumer price index (above), which rose at an annual rate of 6.4% last month
January marked the seventh straight month of annual inflation falling from a peak of more than 9% this summer, although progress may be faltering
Friday’s Commerce Department report also showed that spending rose more-than-expected in January, even as the savings rate rose.
All in all, the economic data could cast doubt on Fed Chair Jerome Powell’s assessment this month that the “disinflationary process” has begun
Fed policymakers used this view to justify their smaller quarter-point rate hike at the central bank’s meeting earlier this month, which called for a quarter-point rate hike in 2022, following a series of larger rate hikes.
“If the Fed had had that data at the last meeting, it probably would have raised 50 (basis points) and the tone of the press conference would have been very different,” said Gene Goldman, chief investment officer at Cetera Investment Management.