Inflation gauge favored by Fed showed prices grew as expected in January
Commerce Department releases closely watched inflation data
Inflation is something to worry about: Ed Yardeni
Yardeni Research President Ed Yardeni analyzes new economic data amid market weakness on Making Money.
The Federal Reserve's preferred inflation gauge showed prices rose as expected in January at a pace that remains above the central bank's target level as its efforts to tamp down inflation continue.
The Commerce Department on Friday reported that the personal consumption expenditures (PCE) index was up 0.3% from the prior month and 2.5% on an annual basis. Those figures were in line with the estimates of economists polled by LSEG.
Core PCE, which excludes volatile food and energy prices, rose 0.3% for the month and 2.6% from a year ago, in line with estimates.
Federal Reserve policymakers are focusing on the PCE headline figure as they try to slow the pace of price increases to their target of 2%, though they view core data as a better indicator of inflation. Headline PCE declined slightly from 2.6% in December, while core PCE dropped from 2.9% last month.
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Headline PCE showed that prices for goods increased 0.5% in January after they had been relatively flat in recent months. Prices for services rose 0.2% last month, which was a slower pace than the 0.4% in December.
Wages and salaries were up 0.4% in January from a month ago, the same as the increase seen in December.
The personal savings rate as a percentage of disposable income was 4.6% in January, the highest rate recorded since 4.8% in June and a notable jump from the 3.5% rate recorded a month ago.
EY chief economist Gregory Daco noted that the 1.1 percentage point rise in the personal saving rate is "noteworthy as it could indicate the onset of a precautionary savings by households. It's too early to conclude whether that is the case, but this will be something to monitor as tariff threats, federal government layoffs, and tax uncertainty loom."
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Inflation remained stubbornly high in January, though prices grew at a slower pace than in December. (Photo by FREDERIC J. BROWN/AFP via Getty Images / Getty Images)
The Commerce Department's report comes as the Federal Reserve is due to meet in mid-March for its next policy meeting, which falls after more of President Donald Trump's proposed tariffs are due to take effect. The potential for consumer prices to rise as a result of the tariffs, as the cost of the import taxes are passed on, has been noted by central bank policymakers.
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"The Fed will be glad to see inflation cooled in January but is concerned about the outlook for prices," said Comerica chief economist Bill Adams. "Higher tariffs will raise prices of imported goods as well as Made-in-America manufactured goods, whose producers can charge higher prices with less foreign competition."
"Also, the push to ramp up deportations could tighten the job market and revive inflation pressures from faster wage growth in occupations with chronic shortage of workers like farm workers, construction workers, home health aides, and restaurant kitchen crews," Adams explained.
Fed Chair Jerome Powell said after the central bank's last meeting that policymakers are attentive to potential risks to the labor market and inflation. (Photo by Liu Jie/Xinhua via Getty Images / Getty Images)
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The Federal Reserve lowered its target range for the benchmark federal funds rate by 50 points in September, followed by a pair of 25 basis point cuts in November and December. The central bank left rates unchanged at a range of 4.25% to 4.5% in January amid uncertainty about inflation and the labor market.
Policymakers are expected to hold rates steady at their next policy meeting in mid-March, with the market pricing in a 94.5% probability of rates being left unchanged, according to the CME FedWatch tool. That was up from 68.5% a month ago.