Fed's Preferred Inflation Gauge Picks Up
February 27, 2023
The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, rose more than expected in January, triggering a market sell-off and increasing pressure on the central bank to keep hiking rates.
The PCE price index, which measures how much consumers pay for goods and services, increased by 0.6% in January after rising by 0.2% in December. The annual rate increased to 5.4% in January from an upwardly revised figure of 5.3% a month earlier. The core PCE index, which strips out volatile food and energy costs, increased to 4.7% annually from an upwardly revised figure of 4.6% in December, missing economists’ expectations for a moderation to 4.3%.
Consumer spending, adjusted for prices, jumped 1.1% from the prior month, the most in nearly two years, after consecutive declines. Of particular concern was the shift in spending by households to services. The Fed worries that service consumption will fuel demand for workers, already in short supply, and lead to upward pressure on wages – the dreaded “wage-price spiral” they hope to avoid at any cost.
Following the release of the PCE data on Friday, investors priced in a 39% chance of a half-point rate rise at the Fed’s March meeting, compared with an 18% likelihood a week ago, according to CME Group’s FedWatch tool. Bets on a quarter-point rise dropped from 82% to 61% over the same period. The S&P 500 fell 1.1% on Friday, taking the index’s loss for the week to 2.7%, the biggest weekly drop since December.