The inflation rate declined modestly in January, despite growing concerns over the proposed tariffs by President Donald Trump.
According to the Commerce Department’s Friday release of data, the personal consumption expenditures price index (PCE), which is the Federal Reserve preferred inflation indicator, increased by 0.3% in the past month, and 2.5% on an annual basis.
The core PCE Index, which is a major measure used by Fed officials, also increased monthly 0.3%, taking its annual rate down to 2.6% from December’s 2.9%.
Spending declines but income increases
This report revealed that income and expenditure patterns have also changed unexpectedly.
The personal income for this month increased by 0.9%, which is significantly higher than the 0.4% expected increase.
This rise in income did not lead to higher consumer expenditures, as they actually declined by 0.2%. The 0.1% increase expected was missed.
Personal savings rates have risen to 4,6%. This suggests that consumers are becoming more conservative with their money despite higher incomes.
This is likely due to the weather, which included unseasonably low temperatures and snowstorms.
Wildfires in Los Angeles could have also dampened the spending.
The severe winter storms disrupted the homebuilding industry and impacted on job growth in December.
Data are in line with the expectations of a slowdown during the first quarter, as most estimates for GDP for January-March fall below an annualized rate of 2.0%. The fourth-quarter growth was 2.3%.
Fed Rate Cut Expectations Rise
Federal Reserve officials are weighing up their next interest rate move as they consider the data.
Recent statements by Fed officials expressed their confidence in the gradual decline of inflation, but they also stressed that more evidence is needed before any changes to monetary policies are made.
The stock market futures responded positively to the report while Treasury yields moved lower.
Prices of goods increased 0.5% in January. This was largely due to a rise in the price of motor vehicles by 0.9% and an increase in gas prices by 2%.
Housing costs rose 0.3%, while services increased by 0.2%.
The overall inflation trend remains positive, despite these gains. This suggests that the Fed may change its policy later this year.
According to CME Group’s FedWatch indicator, following the release of the FedWatch report, traders increased slightly the chances that the rate will be cut in June. The implied probabilities have risen to just above 70%.
Markets still expect two more rate reductions before the end the year. However, recent expectations have shifted to a third.
The Bureau of Labor Statistics released the Consumer Price Index (CPI) earlier this month. However, the Fed prefers its PCE index because it is broader, can be adjusted to changing consumer behavior, and places less emphasis on housing prices.
Comparatively, January’s CPI showed an annual rate of inflation at 3%, while the core CPI was 3.3%.
The minutes of the Federal Reserve policy meeting held on January 28 and 29, released by the Federal Reserve last week, revealed that policymakers were concerned about inflation risk associated with Trump’s first policy proposals.
As new information becomes available, this post US inflation slows down in January and fuels hopes of a rate cut for June may change.
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