Inflation unexpectedly rose to 5.4% annually in January, as measured by the gauge favored by the Federal Reserve.
The rise in the personal consumption expenditures price index reported Friday morning by the Bureau of Economic Analysis is yet another sign that inflationary pressures are not yet abating in the face of the Federal Reserve’s campaign to slow price gains by hiking interest rates. Inflation is still running much hotter than the central bank’s target and damaging household purchasing power.
Core PCE inflation, a measure of inflation that strips out energy and food prices and is generally less volatile, is clocking in at a 4.7% year-over-year rate.
The Fed's target for inflation is 2%.
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Friday’s latest inflation report comes after two other inflation reports for January came in hotter than expected and appeared to show that inflation is proving sticky, despite the barrage of interest rate hikes conducted by the Fed over the past year.
Last week’s latest producer price index report showed that from December to January, wholesale prices rose 0.7% — the largest one-month inflation since June of last year and an increase that would translate to an annual rate of nearly 9%. Annual inflation fell slightly less than expected to 6%.
Additionally, the 6.4% registered by the consumer price index in January was only down a tenth of a percentage point from December’s annual rate of inflation, further raising fears that the Fed’s aggressive crusade against rising prices isn’t working as quickly as it should.
The stickier inflation readings mean the Fed will likely be keeping rates higher, for longer — something that doesn’t bode well for the prospect of the economy avoiding a recession.
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After the Federal Open Market Committee hiked rates by a quarter of a percentage point at its last meeting earlier this month, some thought the Fed would even forego a rate hike at its next meeting in March. Those hopes have since been dashed.
Investors are now pegging the odds of a quarter percentage point hike at about 73%, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. More than 27%, a number that has been on the rise, now think that the Fed will hike rates by a half percentage point given the recent reports.