A measure the Federal Reserve watches closely to measure inflation rose more than expected in January, suggesting the central bank has more work to do to lower prices.
The price index for personal consumption expenditures, excluding food and energy, rose 0.6% in the month and was 4.7% higher than a year ago, the Commerce Department said on Friday. Wall Street had expected 0.5% and 4.4%, respectively.
Including the volatile components of food and energy, headline inflation increased by 0.6% and 5.4%, respectively.
Markets fell after the newswith futures trailing the Dow Jones Industrial Average by more than 300 points.
Consumer spending also rose more than expected as prices rose, jumping 1.8% for the month versus an estimate of 1.4%. Personal income rose 1.4%, more than the 1.2% estimate. The rate of personal savings also increased, rising to 4.7%.
All the numbers suggest that inflation has picked up at the start of the new year, putting the Fed in a position to likely continue raising interest rates. The central bank raised benchmark rates by 4.5 percentage points from March 2022 as inflation hit a 41-year high.
The Fed tracks the PCE measure more closely than some other inflation metrics because the index adjusts for consumer spending patterns, such as substituting cheaper goods for more expensive ones. This provides a more accurate view of the cost of living.
Policymakers tend to focus more on core inflation because they believe it provides a better long-term view of inflation, although the Fed officially tracks core PCE.
Much of January’s rise in inflation came from a 2% rise in energy prices, Friday’s report said. Food prices rose by 0.4%. Both goods and services grew by 0.6%.
Year-on-year food prices rose by 11.1% and energy prices by 9.6%.
Earlier on Friday, Cleveland Fed President Loretta Mester he said in an interview with CNBC that some progress has been made but “the level of inflation is still too high”.
Mester, a non-voting member of the Federal Open Market Committee, has pushed for more aggressive rate hikes. She said she was unsure whether she would advocate for a half-percentage-point hike again at the March FOMC meeting.
After Friday’s data, market prices rose with the probability of a half-point, or 50 basis point, increase next month to about 33%, according to CME Group data.
