A closely watched US measure of inflation moved higher in January, sending an unambiguous signal price pressures could be on the rise in 2018, according to a government report Thursday.
The uptick in the Personal Consumption Expenditures price index was likely to solidify expectations that the Federal Reserve will raise the benchmark interest rate later this month.
Financial markets in recent weeks have been highly sensitive to signs the Fed could raise rates more than the three rate hikes forecast for this year.
The PCE price index rose 0.4 percent in January from the prior month, on rising non-durable goods prices, which were up three-tenths of a percentage point. The result matched an analyst forecast, but was faster than the prior three months.
Excluding the volatile food and fuel categories, the ‘core’ PCE price index gained 0.3 percent, the largest increase since January 2017, and a level not surpassed in 11 years. The result was also in line with economists’ expectations.
However, there was less action in the key 12-month PCE measure that the Fed watches closely, which held steady at 1.7 percent, the same as the prior two months, still well below the Fed’s two percent target.
The core 12-month measure likewise held at 1.5 percent for the fourth month in a row.
Throughout 2017, economists were baffled by the weakness of inflation, which failed to rise despite falling unemployment and steady job creation. The 12-month core PCE measure has not exceeded the Fed’s two percent target in nearly six years.
The report also showed incomes are rising faster than spending, with inflation-adjusted expenditures actually decreasing by the largest amount in a year – something that could point to weaker GDP growth in the first quarter of 2018.
Personal incomes rose 0.4 percent, or $64.7 billion, with disposable personal incomes jumping 0.9 percent – the largest monthly increase since January 2017 and level not surpassed since December 2012.
Meanwhile, consumer spending rose just 0.2 percent, matching August’s gain. Adjusted for inflation, however, consumer spending fell 0.1 percent, to the lowest level since January 2017.