Prime Highlights:
Personal income saw a sharper-than-expected increase of 0.9% in January, surpassing the anticipated 0.4% rise.
Despite the income boost, consumer spending fell by 0.2%, contrary to expectations for a 0.1% increase.
Headline inflation showed a slight easing, with the overall PCE index rising by 0.3% and posting a 2.5% annual rate.
Key Background:
In January, the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred measure of inflation, increased by 0.3%, reflecting a 2.5% annual rate. Excluding volatile food and energy prices, the core PCE also rose by 0.3% for the month, bringing the annual rate to 2.6%. The Federal Reserve closely monitors this core figure as it offers a more accurate reflection of long-term inflation trends.
This data, which was in line with Dow Jones consensus estimates, suggests a slight easing in inflation compared to December, where the core PCE stood at 2.9%. The 12-month core measure marked a step-down, while headline inflation saw a modest decline of 0.1 consensus point. Despite the positive inflation report, analysts, including Jose Rasco from HSBC, indicated that the Fed will remain cautious, keeping rates steady for now.
Meanwhile, personal income grew by a higher-than-expected 0.9%, surpassing the forecasted 0.4% increase. However, consumer spending showed a surprising decline of 0.2%, contrary to the expected 0.1% gain. The personal savings rate also increased to 4.6%, suggesting a preference for saving over spending.
As the Fed assesses the path of inflation, futures markets have slightly raised the probability of an interest rate cut by June. However, policymakers are likely to wait for further evidence of sustained inflation control before making any significant rate adjustments. The Fed’s strategy remains focused on returning inflation to its 2% target over the longer term.
