The Fed's preferred inflation gauge logged its lowest annual increase since March 2021 in January, matching Wall Street forecasts, while monthly prices rose at the fastest rate in a year.
The core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 2.8% over the prior year in January, the slowest annual increase since a 2.2% increase in March 2021.
Compared to the prior month, core PCE rose 0.4%, the most since January 2023 and an increase from the 0.1% increase seen in December. The monthly increase marked a stark shift in the inflation data.
Prior to Thursday's release, the six-month annualized rate of price increases had been below the Fed's 2% goal for two consecutive months. After the January data, the six-month annualized PCE price increase is 2.5%.
"Fed officials have signaled they do not need better news on inflation to cut rates, just continued good news," Oxford Economics deputy chief US economist Michael Pearce wrote in a note to clients. "With the trend in inflation still downward, gradual rate cuts this year are still on the table."
Headline PCE, which includes all categories, logged a 2.4% increase over last year, a slowdown from last month's 2.6% print.
The print comes at a crucial time in the inflation story after another reading on price increases, the Consumer Price Index (CPI), recently showed prices grew faster than expected in the month of January. The hotter-than-expected report sent stocks lower and prompted investors to shift their interest rate cut expectations.
Read more: Inflation update on everyday expenses: Prescription drugs down, pet care way up
Markets are now pricing in three interest rate cuts for 2024, in line with the Fed's most recent forecast and down from a former consensus of six cuts seen back in December, per Bloomberg data. Before Thursday's report, investors had placed a 58% chance on the first Fed interest rate cut coming in June.
Capital Economics chief North America economist Paul Ashworth wrote in a note to clients on Thursday that the surge in monthly PCE was "largely expected" after other readings on inflation showed a similar trend earlier in January.
"Although that surge has ruled out an early Fed rate cut, particularly in an environment where first-quarter GDP growth appears to be tracking at 2.5% to 3.0%, we don’t think it changes the broader picture," Ashworth said. "There is still plenty of disinflation coming this year, which means that the annual rate of core PCE inflation will be close to the 2% target by mid-year."
The most recent minutes from the Federal Reserve's January meeting showed most officials were concerned about the risks of "moving too quickly" when lowering interest rates. Largely, officials have expressed in recent commentary they want "greater confidence" on inflation's path downward.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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