Jerome Powell Photographer: Al Drago/Bloomberg
Inflation picked up slightly in January, which could make it more likely that Jerome Powell and the Federal Reserve will wait until at least the summer to cut interest rates.
The Personal Consumption Expenditures Price Index, the Fed’s preferred gauge of inflation, increased at a monthly rate of 0.3% in January 2024, its highest increase since September 2023. The PCE Core Price Index, which excludes food and energy, rose 0.4%, its highest increase since January 2023. These increases were in line with economists’ estimates.
Prices were up 2.4% from a year earlier, which is the lowest year over-year inflation rate since February 2021. That is down a bit from the 2.6% growth rate a month earlier, but still well above the Fed’s target of 2% per year.
Taken as a whole, the latest numbers suggest that inflation is still cooling, but not as quickly as before. That could lead the Fed to delay cutting interest rates. While investors had initially expected a rate cut in March, they are now expecting it to be later.
“I think that the Fed will be cutting rates at the earliest in June, if not later,” said Marc Giannoni, Managing Director and Chief US Economist at Barclays Capital. “They will want more confidence that rates will come down to 2%. If inflation turns out to be a little higher in coming months, the Fed might wait even longer to cut rates.”
The Fed last year raised interest rates above 5% for the first time in 17 years in an effort to bring down the rampant inflation which took place for much of 2022.
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Waning inflation fits into the larger trend of positive signs for the US economy. The unemployment rate has remained steadily low, and job gains for January have come in at double the expected amount.
Personal income rose 1% in January, up from a 0.3% gain in December and the largest increase since July 2021. This figure seems to be a one-off, as it primarily reflects increases in government social benefits, like social security benefits and Affordable Care Act enrollments.
There was a 0.2% increase in spending, down from 0.7% last month. The increase reflects a $121 billion increase in spending for services, and a $77 billion decrease in spending for goods. Spending is still rising, but more slowly than at the end of last year. This is good news for the Fed as less spending likely means lower inflation.
“Current economic growth looks to be solid,” says Stan Shipley, Managing Director at ISI Group. “It is slower than what we saw in the fourth quarter, but the Fed can still breathe a sigh of relief. All the recent data give us a soft landing and not a recession.”
With the federal interest rates seemingly stuck where they are and unlikely to be cut any time soon, certain people in the economy are hampered. Borrowers, for example, face higher costs for car loans, mortgages, and credit card debt.
