According to the Commerce Department, the personal consumption expenditures price index, which is the Federal Reserve’s preferred measure of inflation, rose unexpectedly last month. In January, the index increased by 5.4% annually, up from 5.3% the previous month. The monthly increase of 0.6% was the largest since June, when prices rose faster in four decades.
This news caused major stock indexes on Wall Street to experience their worst weekly losses of the year so far, with the Dow Jones Industrial Average falling by 1% during the session and 2.6% for the week, marking its longest losing streak in almost 10 months. The S&P 500 and Nasdaq Composite also fell by 2.7% and 3.3%, respectively.
Excluding volatile food and energy prices, core PCE inflation rose by 0.6% from the previous month, up from a 0.4% rise in the previous month. Compared with the same period the previous year, core inflation increased by 4.7% in January, compared to a 4.6% rise in December. The rise in inflation is concerning given that the Fed’s aggressive rate hikes are having little impact on inflation.
The core PCE is the benchmark for the central bank’s 2% target rate, and it should be the number falling fastest in response to higher rates. The Fed has spent the past year raising its benchmark overnight interest rate aggressively, aiming to slow inflation by raising borrowing costs for businesses and families without tipping the economy into recession.
The Fed’s benchmark rate has increased from near zero last March to a current range of 4.5%-4.75%, the highest level since 2008. The latest data, however, shows that there are still inflationary pressures in the economy, and it will take more on the monetary policy side to get inflation down.
In January, employers added 517,000 jobs, and the unemployment rate fell to 3.4%, its lowest point since 1969. While a strong labor market can fuel inflation by putting upward pressure on wages that businesses then pass along to consumers through higher prices, this is not the only cause of the current inflation.
The recent economic readings may doubt Fed Chair Jerome Powell’s assessment this month that the ‘disinflationary process’ had begun, which the Fed policymakers used to justify their smaller quarter-point rate hike at the central bank’s meeting earlier this month. The available data likely caused a bigger hike and a different tone from the press conference.
»Personal consumption expenditures price index rise 5.4% unexpectedly«
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