The Federal Reserve’s preferred inflation gauges unexpectedly accelerated in January and consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates.
The personal consumption expenditures price index rose 5.4% from a year earlier and the core metric was up 4.7%, both marking pickups after several months of declines. Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines.
US stock futures fell and Treasury yields rose as traders firmed up bets that the Fed will raise interest rates by a quarter-point at each of the next three meetings. Investors also expect a higher terminal fed funds rate.
The resilient spending and stubborn inflation suggest that the Fed’s path to taming prices and demand will be bumpier and longer than data for late 2022 had previously indicated. While that could bolster policymakers’ resolve to raise borrowing costs higher than anticipated and keep them there for longer, it may increase risks of a recession.
The PCE price index increased 0.6% from a month earlier, the most since June, Commerce Department data showed Friday. Excluding food and energy, the core PCE price index also climbed 0.6%. Both advances exceeded projections.
The latest figures underscore the risks of persistently high inflation. Much of the easing that was celebrated at the end of last year has largely been erased after revisions and the acceleration in January.
Furthermore, resilient consumer spending paired with the exceptional strength of the labour market will make it more difficult for the Fed to get inflation to its 2% goal.
The January increase in personal spending reflected a pickup in outlays for goods and services, including motor vehicles as well as food services and accommodation.
“Brisk spending growth and faster price increases for both core goods and supercore services spell bad news for inflation. With supply-chain bottlenecks largely eased, demand has been driving inflation lately. If that trend is sustained, the Fed may have to hike rates beyond the 5.25% implied by December’s”, say Anna Wong, Stuart Paul and Eliza Winger, economists at Bloomberg.
With the unemployment rate at its lowest level in more than 53 years, intense competition for a limited supply of workers has kept upward pressure on pay growth. Higher wages paired with excess savings have underpinned consumers and allowed them to keep spending for a variety of goods and services despite those rapid price increases.
Fed officials, particularly Chair Jerome Powell, have emphasised the importance of price growth in so-called core services ex-housing for the inflation outlook. This category, which is thought to be largely wage dependent, includes everything from health care to haircuts.
Services inflation excluding housing and energy services increased 0.6% in January, according to Bloomberg calculations. The gain marked the second month of acceleration.
Incomes rose 0.6% at the start of the year, bolstered by an acceleration in wage growth. The annual cost-of-living adjustment for Social Security and Supplemental Security Income, which was the biggest increase in decades, offset the expiration of the extended child tax credit as well as a decline in one-time payments made by states.
Inflation-adjusted disposable income surged 1.4% in January, the biggest advance since March 2021 when the government distributed another round of stimulus payments. Wages and salaries, unadjusted for prices, increased 0.9%, more than double the prior’s month gain and the most since July.
The saving rate increased to 4.7%, the highest in a year, from 4.5%.
Inflation-adjusted outlays for merchandise surged 2.2% after sharp declines in the prior two months. Spending on services climbed 0.6%, the most since August.