U.S. prices rose in January due to rising housing and finance costs, but inflation was the lowest in three years, keeping a Federal Reserve interest rate cut on the table.
On Thursday, the Commerce Department reported that consumer spending slowed last month due to lower purchases of cars, furniture, and other durable home goods.
The inflation and consumer spending numbers met economists' estimates. The timing of the first Fed rate decrease is questionable as service charges rose the most in 12 months, likely due to businesses raising prices at the start of the year.
Most economists don't predict February price increases. Service industries like healthcare, restaurants, hotels, motels, and entertainment are key to the U.S. central bank's inflation war. Policymakers said they won't rush to decrease borrowing prices.
“The economy is not going off the rails and the inflation panic in January seems unlikely to continue, so Fed officials are still likely to consider a first interest rate decrease when they meet in June," said FWDBONDS chief economist Christopher Rupkey. Last month, the Commerce Department's Bureau of Economic Analysis reported a 0.3% increase in PCE prices. The December PCE price index was revised down to 0.1% from 0.2%. Goods prices dipped 0.2% as energy prices fell 1.4%, offsetting a 0.5% food price increase.
Motor vehicles, components, clothes, and footwear prices fell. But leisure items, vehicles, furnishings, and domestic equipment cost more. Over the past year, PCE inflation grew 2.4%. It was the lowest year-over-year gain since February 2021 after a 2.6% rise in December.
Last month's consumer and producer price increases were also due to early-year hikes. Economists think the government's approach to remove seasonal swings may not properly account for these price spikes.
Last month, the PCE price index rose 0.4% without volatile food and energy components. It was the biggest monthly growth since February and after a downwardly revised 0.1% gain in December. December's core PCE price index rose 0.2%. After rising 0.3% in December, services prices rose 0.6%, the most since January. They were boosted by 0.6% housing and utility price increases.
Financial services and insurance costs rose 1.3%, likely due to higher share prices. Restaurant, bar, hotel, motel, recreation, and healthcare prices rose. After reaching 2.9% in December, core inflation rose 2.8% in January, the smallest increase since March 2021. PCE pricing measures are used by the Fed to target 2% inflation. To return inflation to target, monthly inflation must be 0.2%.
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