Michelle ThompsonIn January, the persistent concern over rising prices remained prevalent; however, newly released data on Thursday indicated that inflation is still gradually decreasing, albeit with some fluctuations, moving closer to the Federal Reserve’s 2% target.
According to the Commerce Department’s latest figures, the Personal Consumption Expenditures (PCE) price index increased by 2.4% over the 12-month period ending in January, a slowdown from December’s 2.6% rise. The core PCE index, closely monitored by the Fed and excluding energy and food prices, dipped to 2.8% from December’s annual rate of 2.9%.
While the recent data suggested progress towards the Fed’s desired inflation level, it also underscored the unpredictable nature of the ongoing effort to curb surging prices. Prices in January rose at their fastest rate in months compared to December. On a monthly basis, the PCE price index climbed by 0.3%, while the core index surged by 0.4%. In contrast, both indexes had increased by 0.1% in December.
According to FactSet, economists had anticipated a 0.3% increase in the PCE index for the month and a 2.4% rise over the 12 months ending in January, with the core index expected to jump by 0.4% for the month and to moderate to 2.8% annually.
The core PCE index, considered vital by Fed officials for gauging underlying inflation trends, experienced its swiftest monthly growth since February 2023.
In January, consumers reduced their spending.
According to Thursday’s Personal Income and Outlays report, consumers restrained their spending in January. Spending increased by 0.2% for the month, marking a slowdown from the 0.7% surge observed in the previous month.
However, when adjusting for the impact of inflated prices, referred to as “real” spending, there was a slight decrease of 0.1% for the month. This decline stemmed from reduced purchases of goods, particularly fewer trucks, and a scaling back on some services.
In detail, expenditures on goods decreased by 1.1%, whereas spending on services saw a modest increase of 0.4%, as reported by the Commerce Department.
Economists had anticipated flat spending levels, considering the typical post-holiday spending lull and the 0.8% decline recorded in January’s retail sales data.
On February 20, 2024, in Austin, Texas, a staff member aids a customer at The Home Depot store.
At the outset of the new year, household finances experienced a significant upswing: Personal income, encompassing various sources such as income earned by individuals, nonprofits, and trust funds, along with employer contributions to health and pension plans, surged by 1%. This increase matched the notable gain observed in January 2023, marking the largest surge since July 2021, according to data.
Following tax deductions, disposable income increased by 0.3%, while the savings rate slightly rose from 3.7% to 3.8% compared to the previous month.
PNC chief economist Gus Faucher noted on Thursday, “Consumer spending declined in January, marking the first decrease since March 2023.” However, Faucher highlighted that household spending had surged at the end of 2023, and overall, consumers are in a favorable position due to the robust labor market, decelerating inflation, and increasing asset values in both housing and stock markets.
“There is no cause for alarm.”
The latest PCE data concludes a month marked by higher-than-anticipated inflation as indicated by both the Consumer Price Index (reflecting retail-level price changes) and the Producer Price Index (representing wholesale level). While economists and the Federal Reserve emphasize the importance of not extrapolating trends from a single month’s data and acknowledge the inherent volatility in January figures, the recent uptick in inflation reports reaffirms the central bank’s decision to refrain from premature tightening, according to Christopher Clarke, an assistant professor of economics at Washington State University.
Clarke stated to CNN, “It’s an increase, which is not ideal. There’s no need for immediate concern, but it’s certainly a concerning single-month figure.” He also noted that December’s monthly gains were revised downward from 0.2% to 0.1%, emphasizing that the broader, longer-term patterns align with the Fed’s objectives.
Could this be attributed to a New Year’s effect?
One aspect of concern for the Federal Reserve is the 0.6% monthly increase in the “super core” measure of core services excluding housing, highlighted by Nationwide chief economist Kathy Bostjancic in a note released on Thursday.
Bostjancic stated that this, along with the overall core inflation rise, “supports the less dovish stance adopted by Fed officials recently.” She suggested that the January surge in services inflation could be attributed to a “price reset” at the beginning of the year, as mentioned earlier in the week by Victoria Clark, an economist at Citigroup.
Clark noted, “We have historically seen this phenomenon—perhaps more prominently in certain goods, where prices adjust at the start of the new year.” However, this time, it appears to be occurring within the services sector, indicating that such businesses may be passing on increased labor costs to consumers.
Nevertheless, it’s plausible that due to these one-time price increases, January could be an outlier, and similar levels of inflation may not persist in the future. “I would be surprised if January’s strength is replicated,” Clark remarked. “But it underscores the existence of ongoing pressures in the economy.”
Housing costs exert a significant influence on inflation.
Housing has been exerting significant pressure on inflation lately, particularly on the Consumer Price Index (CPI).
The Personal Consumption Expenditures (PCE) price index, considered a comprehensive measure of household expenses, was anticipated to show lower inflation compared to the widely followed CPI. This is largely due to the way shelter-related costs are accounted for in federal data.
The Bureau of Labor Statistics (BLS) includes various components in its shelter index to reflect changes in rents, owners’ equivalent rent of residences, lodging away from home, and household insurance. Shelter holds a greater weight in the overall CPI calculation compared to the PCE index. In January, shelter costs contributed to two-thirds of the larger-than-expected 0.3% monthly increase in the CPI.
While market-rate rents have stabilized, shelter prices remain high and continue to drive inflation. The January CPI data showed a rise in the owners’ equivalent rent index, attributed by economists to record-high home prices.
However, it’s worth noting that the January increase could be influenced by new weighting methods implemented by the BLS, according to a report by Bloomberg citing an email from the agency’s staff. This adjustment in weighting could keep the shelter component elevated for the next few months unless the BLS provides reasons to consider the January spike as a one-time occurrence.
Ian Shepherdson, chief economist of Pantheon Economics, emphasized the importance of understanding the underlying factors affecting inflation trends. Despite expectations of falling core inflation due to various factors such as slowing wage growth and improving supply chains, Shepherdson highlighted the cautious approach of the Federal Reserve, especially following past experiences with transitory inflation. A sustained period of relatively high core CPI/PCE readings could delay the Fed’s decision to ease monetary policy, Shepherdson noted, potentially beyond existing forecasts.
