PCE inflation rises 2.5% year-on-year in January, meeting estimates

Investing.com - U.S. inflation matched the prior month’s pace and slowed on an annualized basis in January, while consumer spending unexpectedly contracted, presenting a muddled economic picture for Federal Reserve policymakers considering the path ahead for interest rates.

The Personal Consumption Expenditures (PCE) Price Index ticked up by 0.3% last month, according to data from the Commerce Department’s Bureau of Economic Analysis on Friday. The figure was in line with December’s pace, which was itself the largest increase since April 2024.

In the 12 months through January, PCE inflation eased slightly to 2.5% from 2.6%, meeting economists’ estimates.

Stripping out food and energy, so-called core PCE inflation came in at 2.6% year-on-year, cooling from 2.9% in December and equalling predictions. The initial December gauge was at 2.8%.

On a monthly basis, core PCE accelerated marginally to 0.3% from 0.2%, also meeting forecasts.

Meanwhile, consumer spending, which accounts for a large bulk of U.S. economic activity, dropped by 0.2% following an upwardly-revised expansion of 0.8% in December. Analysts had seen the number increasing by 0.2%.

The Fed, which keeps particularly close tabs on the PCE data, pushed pause on a cycle of interest rate reductions at its last meeting in January, partly citing concerns around the possible impact of U.S. President Donald Trump’s import tariff and immigration plans on inflation. The central bank had slashed borrowing costs by 100 basis points to a range of 4.25% to 4.5% in a series of gatherings late last year. It had hiked rates by a sharp 5.25 percentage points in 2022 and 2023 in a bid to stamp out elevated price pressures.

"[W]ith inflationary tariff measures pilling up, we stand by our view that rate cuts are off the table this year," said Thomas Ryan, North America Economist at Capital Economics.

"The Fed’s job becomes trickier if January’s sharp decline in consumption was a sign of consumer strength buckling, but some of it can be attributed to unseasonably severe winter weather."

Financial markets are widely betting that the Fed will resume cutting interest rates in June.

Investors have been assessing a raft of recently soft economic data, including figures showing the steepest slump in U.S. consumer confidence in 3-1/2 years in February and a dip in consumer sentiment to a 15-month low. A separate survey also pointed to a near-stalling in business activity.

Meanwhile, jobless claims posted their biggest gain in five months last week, likely due to inclement weather. Although the underlying trend in claims remains broadly steady, worries have swirled around the possible upcoming effect of a barrage of federal workforce cuts.