West News Wire: The favored inflation gauge of the Federal Reserve increased last month at its strongest rate since June, which is a worrying indication that price pressures are still pervasive in the US economy and may prompt the Fed to continue hiking interest rates well into this year.
According to the Commerce Department’s report released on Friday, consumer prices increased by 0.6% from December to January, a significant increase from the 0.2% increase from November to December. Prices increased 5.4% year over year, up from a 5.3% annual increase in December.
So-called core inflation, which excludes volatile food and energy prices, increased by 0.6% from December, up from a 0.4% increase in November. Additionally, compared to a year ago, core inflation increased by 4.7% in January as opposed to 4.6% in December.
The report also showed that consumer spending rose 1.8% last month from December after falling the previous month.
January’s price data exceeded forecasters’ expectations, confounding hopes that inflation was steadily decelerating and that the Fed could relent on its campaign of rate hikes. It follows other recent data that also suggested that the economy remains gripped by inflation despite the Fed’s strenuous efforts to tame it.
Last week, the government issued a separate inflation measure the consumer price index which showed that prices surged 0.5% from December to January, much more than the previous month’s 0.1% rise. Measured year over year, consumer prices climbed 6.4% in January. That was well below a recent peak of 9.1% in June but still far above the Fed’s 2% inflation target.
Since March of last year, the Fed has attacked inflation by raising its key interest rate eight times. Yet despite the resulting higher borrowing costs for individuals and businesses, the job market remains surprisingly robust. That is actually a worrisome sign for the Fed because strong demand for workers tends to fuel wage growth and overall inflation. Employers added a sizzling 517,000 jobs in January, and the unemployment rate fell to 3.4%, its lowest point since 1969.
“Reaccelerating price pressures, coupled with a still-strong labor market that is restoring incomes and is supporting demand, will keep the Fed on track to hike rates further over coming meetings,’’ said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
The Fed is thought to monitor the inflation gauge that was issued Friday the personal consumption expenditures price index even more closely than it does the government’s better-known CPI.
The PCE index typically displays a lower amount of inflation than the CPI. That’s partly because rents, which have increased dramatically, are weighted twice as heavily in the CPI as they are in the PCE.
The PCE price index aims to take into account adjustments in consumer behavior brought on by increases in inflation. As a result, it can identify new trends when, for instance, consumers switch from expensive national brands to store brands that are less expensive.
A concerning increase in the consumer price index was seen between December and January: It increased by 0.5%, five times as much as it had from November to December.
The government’s measure of wholesale inflation, which depicts price increases before they reach consumers, also increased from December to January by 0.7% after falling from November to December by 0.2%.