The Economy

Core Inflation Measure Jumps 0.3% in January

Inflation remains below the Fed's target "but there are indications it may be starting to pick up."
Matthew HellerMarch 1, 2018

A gauge of underlying U.S. inflation posted its largest gain in 12 months in January, while consumer spending growth slowed after a robust fourth quarter.

The Commerce Department reported Thursday that the personal consumption expenditures price index rose 0.4% in January, following a 0.1% gain in December. It was the biggest increase in the PCE since September.

The Federal Reserve’s preferred inflation measure — core PCE that excludes the volatile food and energy categories — advanced 0.3% in January, the largest gain since January 2017.

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On an annualized basis, the core PCE price index has fallen short of the Fed’s 2% target since mid-2012. In January, the 12-month advance was flat at 1.5% for the fourth straight month.

But CNBC suggested the report would bolster “views that price pressures will accelerate this year,” noting that inflation is expected to breach the Fed’s target this year as a tightening labor market boosts wage growth.

As MarketWatch reports, “The Fed is watching inflation closely to determine how many times to raise interest rates in 2018 — three as previously planned or four if prices start to rise more rapidly.”

“The jury is still out,” MarketWatch added. “The economy is growing steadily and the labor market is so tight wages are starting to accelerate, but inflation still isn’t rising very rapidly.”

In January, the Commerce Department said, incomes rose 0.4% and after-tax incomes posted the biggest gain since 2012 in the wake of the Trump administration’s tax cuts. Real disposable income surged 0.9%.

“Inflation remains below the Federal Reserve’s 2 percent goal, but there are indications it may be starting to pick up,” Gus Faucher, chief economist at PNC Financial Services, told MarketWatch. “Core inflation, after falling in the first half of 2017, has risen over the past half-year. And wage pressures appear to be building, with the tight job market leading to stronger growth in average hourly earnings.”

Consumer spending rose only 0.2% in January — the smallest increase since August — as shoppers cut back after the holidays but is expected to remain quite healthy, helped in part by recent tax cuts. ]

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