According to a key indicator the Federal Reserve analyses when deciding whether to decrease interest rates, U.S. inflation increased in January as predicted.

As anticipated by the Dow Jones consensus forecasts, the personal consumption expenditures price index, which excludes food and energy costs, grew by 2.8% from a year ago and by 0.4% for the month. In December, the monthly gain was only 0.1%, and it was 2.9% from the previous year.

In comparison with predictions for 0.3% and 2.4%, headline PCE—which includes the volatile food and energy categories—rose 0.3% monthly and 2.4% annually over the course of a year, as reported by the Bureau of Economic Analysis of the Commerce Department on Thursday. In December, the corresponding figures were 2.6% and 0.1%.

The actions were taken in the midst of an unanticipated increase in personal income of 1%, significantly higher than the predicted 0.3%. Expenditure fell by 0.1% compared to the predicted 0.2% growth.

Price increases in January were a reflection of the continued movement away from products and towards services as the economy recovers from the disruptions caused by the Covid epidemic.

Prices for services grew 0.6% during the month while prices for products decreased by 0.2%; over the course of a year, services gained 3.9% while prices for goods decreased 0.5%. Food costs increased by 0.5% within those categories, but a 1.4% decline in energy prices was mitigated. Food saw a 1.4% increase year over year, while energy saw a 4.9% decrease.

Despite the fact that the core reading on an annual basis was the lowest since February 2021, both the headline and core measures are still over the Fed’s target for 2% annual inflation. Although the Fed formally use the headline measure, policymakers typically focus more on core since it provides a more accurate picture of the direction of long-term trends.

“Overall, [the report] is meeting the expectations, and some of the worst fears in the market weren’t met,” said Stephen Gallagher, chief U.S. economist at Societe Generale. “The key is we’re not seeing the broad nature of increases that we had been more fearful of.”

Treasury yields marginally decreased and stock market futures modestly increased in response to the news, but Wall Street did not react much. There was no movement in the futures markets, where traders bet on the trajectory of interest rates, with pricing skewed towards the Fed’s first rate decrease in June.

The BEA survey released on Thursday also revealed that despite rising prices, people are still cutting back on their savings. The monthly personal savings rate was 3.8%, up a tenth of a percentage point from June 2023 but still marginally higher than December.

In other business-related news, a Labour Department study revealed that employers are still hesitant to fire employees.

For the week ending February 24, the number of initial unemployment claims was 215,000, which was higher than the Dow Jones projection of 210,000 and up 13,000 from the prior period, but remained mostly consistent with recent trends. Still, ongoing claims, which are one week behind schedule, increased to slightly over 1.9 million, up 45,000 from the FactSet forecast of 1.88 million.

The findings are released at a time when central bank policymakers are considering how to proceed with monetary policy after raising interest rates by 5.25 percentage points in total.

The hikes, which took effect from March 2022 to July 2023, coincided with the Fed’s efforts to combat inflation, which peaked in mid-2022 at a level above 40 years.

Recently, officials have stated that they hope to start rolling back the increases later this year. However, recent data suggests that inflation may be more resistant than anticipated, casting doubt on the timing and scope of the policy easing.

“Hot January inflation data adds to uncertainty and pushes back rate cut expectations,” said David Alcaly, lead macroeconomic strategist at Lazard. “But odds remain that this is a speed bump and that, while there may be additional short-term swings in market narrative, it will ultimately matter more how deep any rate cutting cycle goes over time than when it begins.”

The consumer price index data from January stoked concerns about chronically high inflation, even though many analysts believed the spike was due to seasonal reasons and that housing costs would not likely continue to grow.

Although the PCE receives inputs from the CPI, Fed officials pay more attention to the latter since it accounts for the substitutes that consumers make for goods and services when prices decline. The PCE is thought to provide a better representation of what consumers are truly purchasing, whereas the CPI is thought to be a more basic price indicator.

(Adapted from CNBC.com)