The January Personal Consumption Expenditures (PCE) report was released this morning to eager ears as Wall Street continues to hold its breath over potential Fed rate cuts. Inflation rose at the fastest pace in four months, per the PCE, confirming speculation that price growth may not ease as quickly as some economists had previously hoped.
The PCE climbed 0.3% in January, contributing to an annual inflation rate of 2.4%, from 2.6% in December, in line with projections. The core PCE, which excludes the volatile Food and Energy categories, climbed 0.4% in the first month of the year, the sharpest increase in a year, at a 2.8% annual rate. The Core PCE is the Federal Reserve’s most-cited inflation measure.
Today’s PCE report comes as something of a follow-up to the surprisingly hot Consumer Price Index (CPI) report released earlier this month. If you recall, the January CPI came in far hotter than anticipated, showing inflation up 3.1% year-over-year, compared to expectations for a 2.9% reading. Core inflation climbed 3.9% annually, worse than forecasts of 3.7%.
Since then, investors and economists alike have anxiously awaited the PCE, if for no other reason than to validate the CPI reading.
What Does the PCE Report Mean for Fed Rate Cuts?
As always, the real interest behind the PCE lies in the central bank. Fed Chair Jerome Powell told reporters in January that Fed officials want to see more data confirming that inflation is on its way down to 2%. Indeed, Powell warned that it may be a “bumpy” road to the Fed’s 2% goal, which this month’s PCE and CPI reports may represent.
As such, the two reports have pushed the chances of a Fed rate cut in March down considerably. In fact, according to the CME FedWatch Tool, interest rate traders are only pricing in a 2.5% chance the central bank cuts rates at the next policy meeting.
The inflation reports may also affect the number of rate cuts the central bank opts to levy this year. While the central bank has previously suggested three to four 25 basis-point cuts will come in 2024, should inflation prove more stubborn than anticipated, the Fed may opt for fewer rate cuts.
That said, this only marks one month of disappointing inflation, hardly enough to jump to any definitive conclusions.
“One month data [sic] doesn’t make a trend,” said Satyam Panday, chief U.S. economist of S&P Global Ratings, in an email to InvestorPlace:
“It will be prudent to hold back on passing any strong judgment till February data comes out next month — if January’s acceleration is a one-off that was perhaps due to the failure of seasonal adjustment factors to incorporate the true extent of firms raising prices at the start of the year, or whether it’s the beginning of something more worrisome for the Fed.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
