The Federal Reserve's primary inflation rate, the core PCE price index, fell to a seven-month low in January. However, consumer spending unexpectedly turned negative. The S&P 500, aiming to rebound after Thursday's sharp sell-off, rose modestly following the data.
Clear disinflation progress couldn't come at a better time, since it will give the Fed more leeway to respond to economic weakness, despite inflation risk from Trump tariffs and tax cuts. One month of soft spending should be too troubling after a series of strong months, including an upward revision to December data.
PCE Inflation Data
Both the headline and core personal consumption expenditures price gauges rose 0.3% on the month, matching forecasts. Headline inflation eased to 2.5%, while core inflation slipped to 2.6% from 2.8%, also as expected. Core inflation matched the lowest level since March 2021.
The Fed's key inflation data looks a bit different if it isn't rounded to tenths of a percentage point. The core PCE price index rose 0.285% on the month, which looks better. However, the 12-month core inflation rate only fell to 2.647%, meaning it barely missed a rounding up to 2.7%.
Health Care Inflation Cools Dramatically
A major reason for the fall-off in inflation is suddenly tame prices for health care services, which fell 0.13% in January. The 12-month inflation rate for health care services eased to 1.8% from 2.5% in December. A year ago, health care services inflation was running at 3%.
This is a big deal because health care services is the biggest part of the Fed's core PCE price index, with a 19% weighting.
However, we may not know for a couple of months if some of the decline is technical, related to methodology changes.
That's because health care inflation surged 0.6% in January 2024. Government statisticians have been working at better managing seasonal adjustment for typical price increases to start the year.
Consumer Spending Declines
Personal consumption spending fell by 0.2% in January. That followed strong gains in recent months, including an upwardly revised 0.8% increase in December.
Goods spending fell 1.2%, with a 3% drop in outlays for durable goods, such as autos. Services spending rose 0.3%.
Personal Income Jumps
Personal income surged 0.9% in January, well above 0.3% forecasts. The Bureau of Economic Analysis showed that the increase in personal income reflected increases in government benefits, such as Social Security, higher compensation and higher dividend income.
Wall Street Reaction To PCE Inflation Data
Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote that auto sales recovered in February, while consumer credit lending also has picked up in recent weeks. That suggests "decent spending growth in Q1." However, Tombs says some of that is likely demand being pulled forward by Trump tariff threats to get ahead of price increases.
However, consumer confidence has waned, so consumers are saving more, Tombs says. He sees spending slowing in Q2 and Q3.
Meanwhile, further disinflation progress may be offset by Trump tariffs, which could boost core inflation by a half-percentage point, Tombs said.
Federal Reserve Rate-Cut Odds
Along with the recent good news on inflation, a number of factors have contributed to higher odds for a Fed rate cut, with a cut now seen as quite likely by June. Those factors include Thursday's jump in new jobless claims, a moderation in consumer spending and uncertainty stoked by President Trump's tariff threats, which are beginning to turn to reality.
After the PCE inflation data, odds of a Fed rate cut at the March 19 and May 7 meetings were little changed, at 6% and 32%, respectively. The CME Group FedWatch tool shows 74% odds of a rate cut at the June 18 meeting. Markets see 81% odds of 50 basis points in rate cuts this year, up from 62% a week ago.
S&P 500
The S&P 500 rose 0.3% in Friday morning stock market action. On Thursday, the S&P 500 slid 1.6%, falling to its lowest level since Jan. 14.
Through Thursday, the S&P 500 was up 1.4% since Election Day.
The 10-year Treasury yield pulled back five basis points to 4.24%, the lowest since Dec. 11.
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