Key Inflation Gauge Rose In January—As Interest Rate Cut Hopes Dwindle

Topline

The Federal Reserve’s favored inflation gauge was worse than what Wall Street forecast in January, according to federal data released Friday, as the Iran war—boosting energy prices and fears of rising inflation—has shelved hopes of an interest rate cut from the central bank.

Key Facts

Annual inflation was 3.1% in January, up from 3% in December, according to core consumption expenditures index data reported Friday by the Bureau of Economic Analysis.

That was higher than consensus analyst estimates of 2.9%, according to FactSet.

Headline PCE was 2.8% in January, down from 2.9% in December and below economists’ estimates of 2.9%.

Federal Reserve officials target core PCE data instead of Consumer Price Index reports because the central bank can better understand how Americans spend their money and how their spending habits shift over time.

What To Watch For

The Federal Reserve will meet on March 18 to discuss interest rate cuts, though traders have priced in odds of nearly 100% that rates will be held between 3.5% and 3.75%, according to CME’s FedWatch tool. As inflation remains above the Fed’s 2% target, the Fed is less likely to cut interest rates: Goldman Sachs analysts wrote Wednesday that a “higher inflation path” would “make it harder” for the Fed to start cutting rates. The firm noted that if the labor market weakens sooner and more substantially than expected, concerns of rising oil prices impacting inflation would not be an “obstacle for earlier rate cuts,” adding it still anticipated one more cut before the year’s end.

Key Background

President Donald Trump has pressured the Federal Reserve to quickly cut interest rates, but higher inflation has swayed the central bank away from further reductions. Trump, in a Truth Social post on Thursday, said Fed Chair Jerome Powell should be dropping interest rates “IMMEDIATELY” and “not waiting for the next meeting!” The Iran war has sparked concerns that inflation would continue rising, potentially dispelling hopes of interest rate cuts, after fuel prices jumped more than 11% from January to February and utility gas services rose nearly 11% over the 12 months ending February. Apparel prices rose 1.3% month over month and 2.5% annually, their most since October 2023, as an apparent signal of Trump’s tariffs impacting consumer prices. The average price of a gallon of gas has surged 65 cents since the U.S. first struck Iran two weeks ago, as oil prices rose above $100 once again early Friday.

Further Reading

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