Key Fed inflation estimate improved 0.6% more than anticipated in January

February 27, 2023: An estimate the Federal Reserve watches closely to calculate inflation increased over the anticipation in January, indicating that the central bank has more work to do to lower prices.

On Friday, the Commerce Department reported that the personal consumption expenditures costs index, excluding food and energy, surged 0.6% for the month and increased 4.7% from a year ago. Wall Street had been anticipating readings of almost 0.5% and 4.4%.

The volatile food and energy ingredients headline inflation surged by 0.6% and 5.4%.

Markets decreased after the report, with futures tied to the Dow Jones Industrial Average off over 300 points.

Consumer spending also grew over the idea as prices surged, increasing 1.8% for the month vs the estimate of 1.4%. Personal income increased by 1.4%, higher than the 1.2% estimate. The individual saving rate was up, touching 4.7%.

All of the numbers suggest inflation started the new year, which puts the Fed in a position as it likely will continue to increase interest rates. The central bank has pushed benchmark prices up by 4.5 percentage points since the previous year as inflation reached its highest level in 41 years.

The Fed is following the PCE estimate more closely than other inflation metrics as the index adjusts for consumer spending rules, like substituting lower-priced goods for costlier ones. That provides a more authentic view of the living cost.

Policymakers are focusing more on core inflation as they trust it provides a long-run view of inflation, though the Fed tracks headline PCE.

According to Friday’s report, much of January’s inflation growth came from a 2% rise in energy prices. Food prices increased by 0.4%. Goods and services both increased.

Food prices rose 11.1%, while energy was up 9.6%.

A rate-setting Federal Open Market Committee member who is not voting, Mester has been forcing more aggressive increases. She said she’s still determining if she’ll again advocate for nearly half a percentage point improvement at the March FOMC meeting.

On Friday, market pricing increased for the likelihood of at least half rate, or 50 basis points, increasing the following month, to nearly 33%, according to CME Group data.

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Key Fed inflation estimate improved 0.6% more than anticipated in January
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