The Fed’s Preferred Inflation Measure Unexpectedly Accelerates, Raising Concerns of More Rate Hikes
The Federal Reserve’s preferred measure of inflation, the personal consumption expenditures price index (PCE), unexpectedly accelerated in January, raising fears that rising prices won’t be as easy to control as many had hoped. Friday's Commerce Department data showed that the PCE price index increased 0.6% from the preceding month, the largest increase since June. Besides food and energy, the core PCE price index rose by 0.6%. The progress made exceeded expectations.
The indications of continued inflation suggest that the Federal Reserve will be raising rates further. Investors had previously assumed that the Federal Reserve would not increase interest rates at its upcoming meeting, following the quarter of a percentage point hike at the last meeting earlier this month. Those hopes have now been dashed.
In January, the core PCE deflator, a measure of personal-consumption expenditures, increased by 4.7% year over year. This is an increase from 4.4% in December and surpasses the 4.3% growth rate predicted by economists surveyed by FactSet. At the end of last year, the core PCE had a 4.6% increase, which was hotter than initially reported (4.4%).
Earlier Friday, Cleveland Fed President Loretta Mester noted in a CNBC interview that there has been some progress made but “the level of inflation is still too high.” Mester, a nonvoting member of the Federal Open Market Committee responsible for setting rates, has been advocating for more aggressive rate hikes. At the March FOMC meeting, she expressed uncertainty as to whether she would once again promote a 0.5% increase.
After Friday's data, CME Group data showed that the chance of a 0.5%, or 50 basis point, increase next month rose to around 33%. S&P 500 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 anticipate a higher final rate for the federal funds rate.
Economists projected that the yearly core index would reach 4.
0. “Inflation fuels fear of rate rises in US” The Times, 25 Feb. 2023, https://www.thetimes.co.uk/article/inflation-fuels-fear-of-rate-rises-in-us-6jsddbtfj
1. “Fed’s Preferred Inflation Gauge Accelerates, Adding Pressure for More Rate Hikes” BNN Bloomberg, 24 Feb. 2023, https://www.bnnbloomberg.ca/fed-s-preferred-inflation-gauge-accelerates-adding-pressure-for-more-rate-hikes-1.1887890
2. “Inflationary pressures reflected in food, gas prices” NewsNation Now, 24 Feb. 2023, https://www.newsnationnow.com/rush-hour/inflationary-pressures-reflected-in-food-gas-prices/
3. “Dicey inflation news raises odds of drastic move by Fed that could spell recession” Washington Examiner, 19 Feb. 2023, https://www.washingtonexaminer.com/policy/economy/dicey-inflation-reports-recession-odds-fed-rates
4. “U.S. PCE prices rose 0.6% in January, stoking fears of higher Fed rates for longer By Investing.com” Investing.com, 24 Feb. 2023, https://www.investing.com/news/economic-indicators/us-pce-prices-rose-06-in-january-stoking-fears-of-higher-fed-rates-for-longer-3014080
5. “Key Fed inflation measure rose 0.6% in January, more than expected” NBC News, 24 Feb. 2023, https://www.nbcnews.com/business/business-news/key-fed-inflation-measure-rose-06-january-expected-rcna72219
6. “PCE inflation index jumps to 5.382% YOY or 0.6% in January” Kitco NEWS, 24 Feb. 2023, https://www.kitco.com/commentaries/2023-02-24/PCE-inflation-index-jumps-to-5-382-YOY-or-0-6-in-January.html
7. “Inflation surprisingly rose in January, according to the Fed's preferred gauge” KTVZ, 24 Feb. 2023, https://ktvz.com/money/cnn-business-consumer/2023/02/24/inflation-surprisingly-rose-in-january-according-to-the-feds-preferred-gauge/