Fed’s Core PCE Index Unexpectedly Accelerates, Consumer Spending Soars, Raising Pressure to Raise Interest Rates

The Federal Reserve’s preferred inflation gauge, the Core PCE Index, unexpectedly accelerated in January, while consumer spending surged after a year-end slump, adding pressure on policymakers to keep ratcheting up interest rates.[0] The Core PCE Index rose 0.6% in January compared to the 0.2% in December, resulting in an annual increase of 5.4%, more than double the Fed’s 2% goal. Core PCE inflation (which strips out volatile food and inflation prices) also rose 0.6%, defying expectations it would dip to 4.3%.

After two successive drops, consumer spending, adjusted for inflation, rose by 1.1%, the greatest amount in almost two years.[1] This is indicative of the increased discretionary income that many have been able to enjoy due to the strong labor market and the biggest increase in Social Security payments in decades.

It is forecasted that the Federal Reserve will raise a major short-term interest rate at least a handful of times this year, restraining consumer spending.[2] The markets are now taking into account the expectation of 25-bp rate increases in March, May, and June.[3] According to the CME FedWatch tool, the likelihood of a 25-bp rate hike to 5.25%-5.50% is estimated at 51.9%, and the probability of 5.50%-5.75% is 23.5%.[3]

Warmer weather in January and the boosted Social Security payments have resulted in a rise in the general prices of goods and services in the US economy.[4] The Fed remains motivated to rectify this, and the stronger-than-expected data indicates that the Federal Reserve may have to tighten policy even more to tamp down demand and lower inflation towards its 2% goal.[3]

0. “Inflation surprisingly rose in January, according to the Fed's preferred gauge” CNN, 24 Feb. 2023, https://www.cnn.com/2023/02/24/economy/pce-inflation-january/index.html

1. “Fed's Preferred Inflation Gauge Accelerates, Adding Pressure for More Rate Hikes” Yahoo! Voices, 24 Feb. 2023, https://www.yahoo.com/now/fed-preferred-inflation-gauge-accelerates-135729762.html

2. “Core PCE (YoY) inflation increases to 4.7% in January vs. 4.3% forecast” FXStreet, 24 Feb. 2023, https://www.fxstreet.com/news/core-pce-inflation-report-preview-us-inflation-and-possible-federal-reserve-steps-202302240700

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. “Consumer spending posts biggest gain in almost two years. Don't expect it to last” MarketWatch, 24 Feb. 2023, https://www.marketwatch.com/story/consumer-spending-posts-biggest-gain-in-almost-two-years-on-strong-auto-sales-3be782d

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