- Prices on consumer goods and services increased by 2.5% year-over-year in January.
- Personal income and disposable income both went up 0.9% last month.
- Consumer spending saw its largest monthly drop since February 2021.
Prices on consumer goods and services saw a somewhat slower escalation in January, up 2.5% from this time last year and down from December’s 2.9% annual reading, according to Friday’s Personal Consumption Expenditure Index report from the U.S. Commerce Department’s Bureau of Economic Analysis.
January’s PCE inflation rose 0.3% on a monthly basis and core PCE inflation, which strips out volatile food and energy prices, came in at 2.6% on an annual basis last month, also up 0.3% from December. Core PCE inflation also saw a downtick on a 12-month basis, easing from December’s 2.9% annual rate and hitting its lowest level since June 2024.
Personal income rose 0.9% in January, according to the report, and disposable income, computed by subtracting personal taxes from personal income, also rose by 0.9% last month. But despite upticks in income categories, consumer spending declined by 0.2% in January. The drop is the biggest monthly decline since February 2021.
PCE inflation is the tracking metric preferred by the Federal Reserve over the more frequently cited Consumer Price Index reading. While the CPI measure is computed by tracking the price changes on a representative sampling of goods and services, PCE inflation is determined by how much consumers actually spend on goods and services.
The overall CPI inflation rate in January came in at 3% while core CPI was 3.3%.
It’s worth noting that consumer spending is the primary driver of the domestic economy, accounting for over two-thirds of the total U.S. GDP.
Will the new inflation data push the Fed to drop rates?
While Fed officials will see the January PCE data as a positive indicator, most economists believe the monetary body will likely continue its pause on assessing interest rate adjustments at its next policy meeting scheduled for March 18-19.
After making three straight interest rate cuts to close out 2024, and reducing its benchmark rate by a cumulative 100 basis points, the Federal Reserve’s Open Market Committee voted to leave rates unchanged at its January policy meeting. The Fed’s intra-bank overnight lending rate currently sits at 4.25% to 4.5%.
Last month, Fed Chairman Jerome Powell said a wait-and-see position was appropriate for the time being, pointing to positive U.S. economic indicators including GDP growth in the 2% to 2.5% range, a jobs market and unemployment rate that’s held relatively stable over the past six months and inflation that continues to move, albeit erratically, toward the Fed’s 2% goal.
At a Jan. 29 press conference following the conclusion of the Fed’s meeting, Powell fielded numerous questions about what impacts policy changes promised by President Donald Trump would have on the economy. But the Fed leader noted the body makes its policy decisions based on economic data and doesn’t postulate on the shifting winds of political dialogue.
“I think where the committee is is very much in the mode of waiting to see what policies are enacted,” Powell said. “We don’t know what will happen with tariffs, with immigration, with fiscal policy and with regulatory policy. We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.”
Powell also noted that it’s familiar territory for the Fed to be watching for economic impacts following a federal leadership turnover and accompanying changes in policy direction.
“This is no different than any other set of policy changes at the beginning of a new administration,” Powell said.