The Fed’s preferred inflation measure RISES to 5.4% in the biggest monthly jump since June

The Federal Reserve’s preferred measure of inflation jumped unexpectedly last month, in a worrisome sign for consumers that sent Wall Street’s main stock indexes to their worst weekly losses so far this year.

The personal consumption expenditures price index rose at an annual rate of 5.4% in January, up from 5.3% the previous month, the Commerce Department said on Friday.

On a monthly basis, PCE prices have risen 0.6% since December, the largest monthly increase since June, when prices were rising at their fastest pace in 40 years.

The news sent stocks tumbling, with the Dow Jones Industrial Average ending the day down 337 points, down 1% for the session and down 2.6% for the week.

It was also the fourth consecutive weekly decline for the Dow Jones, its longest losing streak in nearly 10 months. The S&P 500 and Nasdaq Composite were also down 2.7% and 3.3% for the week, respectively.

The Dow Jones Industrial Average ended the day down 337 points, down 1% for the session and down 2.6% for the week.

Stripping out volatile food and energy prices, so-called core PCE inflation has also risen 0.6% since December, up from a 0.4% rise the previous month.

And compared to a year earlier, core inflation rose 4.7% in January, up from a 4.6% year-on-year rebound in December.

It is a worrying sign that the Fed’s aggressive rate hikes are having little impact on inflation. The core PCE is the benchmark for the central bank’s 2% target rate, and it should be the number that falls fastest in response to higher rates.

The PCE is an alternative measure to the better-known consumer price index, which last month rose at an annual rate of 6.4%, more than expected, although still a slight decline from the previous month.

The latest report “is another indication that the momentum of inflation and price pressures are still with us,” Cleveland Fed President Loretta Mester told Reuters on the sidelines of a conference in New York.

“It’s going to take more effort on the part of the Fed to get inflation on that sustainable downward path to 2%,” added the Fed’s chief policy officer.

The Fed has spent the past year aggressively raising its benchmark overnight interest rate in an attempt to curb inflation by raising borrowing costs for businesses and households.

The goal is to cool the economy without driving it into recession, a delicate balance.

A trader works on the floor of the New York Stock Exchange on Friday as shares ended lower, capping off their worst week of 2023.

The S&P 500 was also down 2.7% for the week.

The Nasdaq Composite lost 3.3% on the week

The Fed raised its benchmark rate from near zero last March to a current range of 4.5%-4.75%, the highest level since 2008.

Markets had increasingly forecast three additional quarter-point hikes this year before the Fed stabilized in the upper 5.5% range.

Pricing now also offers a 40% chance of an even higher break point for that rate, up from 30% prior to the PCE data release.

And traders largely erased what had been consistent bets on Fed rate cuts towards the end of the year, pricing in a year-end Fed policy price of 5.26%.

‘There are inflationary pressures in the economy, the level of inflation is still too high and it will take more on the monetary policy side to bring inflation down, Mester said.

Overall, economic data in recent weeks has been stronger than expected, with job growth still strong and wage gains exceeding what Fed Governor Phillip Jefferson said on Friday was consistent with a return. timely to inflation of 2%.

Employers added 517,000 jobs in January, and the unemployment rate fell to 3.4%, its lowest point since 1969.

A strong labor market can fuel inflation by pushing up wages, which are then passed on to consumers by businesses in the form of higher prices.

The PCE is an alternative measure to the better-known consumer price index (above), which last month rose at an annual rate of 6.4%.

January marked the seventh straight month of declining annual inflation since this summer’s peak of more than 9%, though progress may be stalling

The Commerce Department report on Friday also showed that spending in January rose more than expected, even as the savings rate rose.

Altogether, the economic readings may cast doubt on Fed Chairman Jerome Powell’s assessment this month that the “disinflationary process” had begun.

Fed policymakers used that view to justify their smaller quarter-point rate hike at the central bank meeting earlier this month, resulting in a quarter-point rate hike after a series of larger increases in 2022.

“If the Fed had this data at the last meeting, it probably would have gone up 50 (basis points) and the tone of the news conference would have been very different,” said Gene Goldman, chief investment officer at Cetera Investment. Management.