U.S. PCE prices rose 0.6% in January, stoking fears of higher Fed rates for longer

By Geoffrey Smith 

Investing.com -- The Federal Reserve's preferred measure of inflation flashed red again on Friday, adding to concerns that interest rates will have to rise some way yet in order to bring prices back under control.

The price index for personal consumption expenditures rose 0.6% in January - both in core and headline terms - while December's data were also revised higher. Analysts had reckoned with a rise of only 0.4% in the core index, which is the one most cited by the Fed.

That meant that the core rate of PCE inflation ticked up for the first time in four months, to 4.7% - still more than twice the Fed's 2% target. 

U.S. financial markets reacted negatively to the news, quickly repricing their expectations for official interest rates. By 08:40 ET (13:40 GMT), the yield on the benchmark 2-Year Treasury note - a rough proxy for Fed expectations - was up 7 basis points at 4.77%, its highest since October. The dollar index, which tracks the greenback against a basket of developed market currencies, jumped 0.5% to 105.04, a seven-week high. S&P 500 futures meanwhile fell over 1.3%.

Stock and bond markets have been under pressure for over a week now as a string of data releases have suggested that the economy is not coming off the boil as quickly as seemed to be the case at the end of last year, when the headlines were dominated by a succession of mass layoffs at big technology companies. Successive reports from the labor market have showed the newly laid-off being rapidly absorbed by companies that - nationwide - have almost two jobs available for every unemployed person. 

Other data released at the same time also showed that consumer spending held up more strongly than expected in January. Personal spending rose 1.8% from December – the biggest monthly rise since March 2021 - even though incomes rose by a smaller-than-expected 0.6%. The income figure was a crumb of consolation for those arguing that there is little or no evidence to suggest that excessive wage growth is driving inflation. Wage growth adjusted for inflation has been negative for well over a year. 

Even so, "with spending strong, inflation should prove stickier than initially expected," said Kathy Jones, chief fixed-income strategist with Charles Schwab, via Twitter. "The markets are still pricing in a peak fed funds rate in the 5.25% to 5.5% range, but that peak expected rate keeps inching higher."