The Fed’s preferred gauge of inflation accelerated

Inflation remains stubbornly elevated in America and rose unexpectedly in January, fresh data from the Federal Reserve’s preferred index showed, underscoring the daunting challenge facing central bankers as they try to wrestle price growth back to a normal pace.

Price measures Personal consumption rose 5.4 percent in January from a year earlier, Friday’s report showed. That was more than the 5 percent economists had expected, and up from December’s 5.3 percent, which was revised higher.

Stripping out food and fuel prices, both of which have been bouncing around a lot, the price index rose 4.7 percent year-to-date last month, also more than expected in a Bloomberg survey of economists.

These inflation figures are well above the Fed’s target of raising prices by 2%. And details of the report offered further cause for concern: Price growth has slowed sharply on a monthly basis in recent months, but is now showing signs of accelerating. The overall index rose 0.6 percent between December and January, the fastest rate of growth since last June.

The bottom line is that rapid inflation may have shown the first signs of slowing, but it has not yet been defeated. Fed officials raised rates last year at the fastest pace since the 1980s in an effort to cool consumer demand and force price growth to moderate, and in recent weeks have indicated they may have to push borrowing costs higher than they had originally anticipated if the price increases and the economy is not easing as much as they expect in the coming months.

The report also offered a snapshot of spending — and suggested that American consumers are still going strong.

Personal spending, which includes both goods and services, rose 1.8 percent in January. That compares with a modest 0.1 percent decline in December, more than the 1.4 percent increase economists had expected. Adjusted for inflation, consumer spending rose last month.

Whether consumers will continue to spend is a key question as the Fed considers its next policy moves. If demand remains strong, it could make it harder for the economy to slow down enough that businesses would charge less and inflation would fully return to normal.

Central bankers have raised interest rates from near zero this time in 2022 to more than 4.5 percent starting this month. Officials signaled in December that they might eventually have to raise rates to just above 5 percent, but those estimates did climbed a little higher. And key politicians have made it clear they will do more if the economy doesn’t slow as expected.

Higher interest rates weigh on the economy by making it more expensive for households to borrow money to buy a car or house and for businesses to finance expansion. As these transactions stall, aftershocks ripple through the economy, slowing down not only the housing and auto markets, but also the labor market and retail and service spending as a whole.

But the full effect of policy takes time to play out, making it difficult for central bankers to assess in real time how much policy tightening is just the right amount to slow the economy and bring inflation down.

Fed officials will analyze a range of data — on jobs, spending and inflation — ahead of their next meeting on March 21-22.

They may also take a signal from recent earnings that suggested the economy is starting to lose some of its heat, although it’s still not quite back to normal. Corporate profit margins have increased drastically, but may have begun to stagnate as firms find it increasingly difficult to charge higher and higher prices.

In 2022, “we see a resilient customer who is less price-sensitive than we would expect in the face of persistent inflation,” said Ted Decker, Home Depot’s chief executive. with analysts this week. But “we saw some slowdown in certain products and categories that was more pronounced in the fourth quarter.”