Former JP Morgan Chase chief economist Anthony Chan analyzes the rise in oil prices for Varney & Co.
The Federal Reserve is preferred inflation meter remained stubbornly high in January as consumers continued to experience high price growth.
The Ministry of Commerce reported this on Friday personal consumption expenditure (PCE) index rose 0.3% month-on-month in January and is up 2.8% from a year ago. The monthly figure was in line with the expectations of economists surveyed by LSEG, while the annual figure was slightly lower than the estimate of 2.9%.
The core PCE, which excludes volatile measures of food and energy prices, rose 0.4% from a month ago and was up 3.1% year over year. Both figures were in line with economists’ expectations based on the LSEG poll.
Federal Reserve policymakers are focusing on the PCE headline figure as they try to return inflation to their long-term target of 2%, even though they view core data as a better indicator of inflation. Compared to December figures, headline PCE inflation fell slightly from 2.9%, while core PCE rose from 3%.
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Prices for goods rose 1.3% year-on-year in January, up from 1.7% in December. Goods price increases were even lower last summer, when the index posted an annual increase of 0.6% in June and July and 0.9% in August.
Durable goods prices rose 2.2% in January from a year ago, compared with a 2.1% increase in December. From June to November the index was close to 1%. Nondurable goods prices rose just 0.8% in January, down from the 1.6% annual rate recorded in December and the lowest since August.
PCE inflation was 2.8% higher than a year ago, while core PCE is 3.1% higher. (Michael Nagle/Bloomberg via Getty Images/Getty Images)
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Services prices rose by 3.5% in January compared to a year ago. That is slightly higher than the service sector inflation rate of 3.4% that lasted from September to December.
The personal savings rate as a percentage of disposable personal income was 4.5% in January. That represents an increase from the 4% savings rate that prevailed from October through December, and is also the highest reading for the index since it was last at 4.5% in July.
What experts say
“Income and consumption looked positive in the first month of the year, but inflation will remain a concern for monetary policy going forward, especially due to the recent rise in oil and gasoline prices,” said Raymond James chief economist Eugenio Aleman.
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Jeffrey Roach, chief economist at LPL Financial, said that with PCE inflation data showing a monthly increase of 0.3%, investors “need to see monthly prints consistently within the 0.1% and 0.2% range before they can realistically believe that inflation risks are largely under control.”
“Underlying inflationary pressures will continue to boil beneath the surface and next month’s pressures will also be affected by the war in the Middle East. We expect the Fed to emphasize uncertainty on both sides of the mandate. Inflation will be affected by the war and unemployment will be affected by the labor market disruptions,” Roach added.
Federal Reserve Chairman Jerome Powell and central bank policymakers will meet next week. (Chip Somodevilla/Getty Images)
What does this mean for the Fed?
Federal Reserve policymakers will hold a monetary policy meeting next week on March 17 and 18, when the Federal Open Market Committee will announce its decision on interest rates.
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The market expects the Fed to keep the Fed Funds rate steady at the current range of 3.5% to 3.75%, with the CME FedWatch tool showing a 99.1% probability that the Fed will leave rates unchanged – up from 96.5% a week ago and 90.8% a year ago.
