US Core PCE Price Index Signals Inflationary Pressure, Fed Rate Hikes Likely
The US Bureau of Economic Analysis released the Core Personal Consumption Expenditures (PCE) Price Index data on Friday, February 24th, which came in higher than expected, indicating that inflation is on the rise in the US. The Federal Reserve’s preferred measure of inflation showed a 5.4% year-over-year increase in January, up from 5.3% in December. The annual Core PCE Price Index, the Fed’s preferred gauge of inflation, edged higher to 4.7% from 4.6% in the same period, compared to analysts' forecast of 4.3%. The Core PCE Price Index rose 0.6% in January compared with December.[0]
The Personal Consumption Expenditures (PCE) Price Index rose 0.6% in January from the prior month, while the core measure of prices, which excludes food and energy costs, rose 0.6% in January from the prior month, compared with December's 0.4% increase.
The Core PCE Price Index data was released in the Personal Income and Outlays report published by the BEA.[1] This report contains the newest calculations of consumer income and expenditures.[1] In January, Personal Income showed an increase of 0.6% month-over-month and Personal Spending rose by 1.8%.[2] The Personal Saving rate increased to 4.7% in January from 4.5% in December.
The robust data suggests that the Federal Reserve may need to take additional measures to decrease demand and bring inflation closer to its 2% target.[3] It is now expected that the rate will be increased by 25 basis points in March, May, and June.[3] According to the CME FedWatch tool, there is a 51.9% chance of a 25bp rate increase to a range of 5.25%-5.50%, and a 23.5% chance of a further jump to 5.50%-5.[4]
CME Group's FedWatch tool is currently predicting a 67% chance of a 0.25% rise in rates, based on the futures contract prices in the short-term market affected by the Federal Reserve.[5] Roughly one-third of people now believe that the Federal Reserve will increase rates by a 0.5 percent margin, a notion that has been gaining traction due to recent developments.[5]
0. “Personal Income and Outlays, January 2023” Forex Factory, 24 Feb. 2023, https://www.forexfactory.com/news/1207560-personal-income-and-outlays-january-2023
1. “Inflation surprisingly rose in January, according to the Fed's preferred gauge” WICZ, 24 Feb. 2023, https://www.wicz.com/story/48444410/inflation-surprisingly-rose-in-january-according-to-the-feds-preferred-gauge
2. “Americans splash out with abandon in January” ShareCast, 24 Feb. 2023, https://www.sharecast.com/news/international-economic/americans-splash-out-with-abandon-in-january–12464212.html
3. “Consumer spending jumps more than expected in January, PCE inflation speeds up” Seeking Alpha, 24 Feb. 2023, https://seekingalpha.com/news/3940619-consumer-spending-jumps-more-than-expected-in-january-pce-inflation-speeds-up
4. “Personal spending seen climbing in January, but what did prices do: PCE preview” Seeking Alpha, 23 Feb. 2023, https://seekingalpha.com/news/3938481-personal-spending-seen-climbing-in-january-but-what-did-prices-do-pce-preview
5. “Inflation rose to 5.4% in January, according to key gauge watched by Fed” Washington Examiner, 24 Feb. 2023, https://www.washingtonexaminer.com/policy/economy/inflation-rose-to-5-4-in-january-according-to-key-gauge-watched-by-fed
