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Fed’s favorite core inflation measure hits 2.6% in January, as expected

Inflation eased slightly in January as worries accelerated over President Donald Trump’s tariff plans, according to a Commerce Department report Friday.

The personal consumption expenditures price index, the Federal Reserve’s preferred inflation measure, increased 0.3% for the month and showed a 2.5% annual rate.

Excluding food and energy, the core PCE also rose 0.3% for the month and was at 2.6% annually. Fed officials more closely follow the core measure as a better indicator of longer-term trends. The 12-month core measure showed a step down from the upwardly revised 2.9% level in December. Headline inflation eased by 0.1 percentage point.

The numbers all were in line with Dow Jones consensus estimates and likely keep Fed Chair Jerome Powell and his colleagues on hold for the time being regarding interest rates.

The inflation report was “good, but we’re not done,” said Jose Rasco, chief investment officer for the Americas at HSBC Global Private Banking and Wealth Management. “So that prudent patient Powell, as I call him, is going to remain in play, and I think he’s going to wait.”

Elsewhere in the report, income and spending numbers showed some surprises.

Personal income posted a much sharper increase than expected, up 0.9% on the month against expectations for a 0.4% increase. However, the higher incomes did not translate into spending, which decreased 0.2%, versus the forecast for a 0.1% gain.

The personal savings rate also spiked higher, rising to 4.6%.

Stock market futures pointed higher following the report while Treasury yields were mostly lower.

The report comes as Fed policymakers weigh their next move for interest rates. In recent weeks, officials mostly have expressed hopes that inflation will continue to gravitate lower. However, they have indicated they want more evidence that inflation is headed sustainably back to their 2% goal before they will lower interest rates further.

Goods prices rose 0.5% on the month, pushed by a 0.9% increase in motor vehicles and parts as well as a 2% jump in gasoline. Services increased just 0.2% and housing rose 0.3%.

Following the report, futures traders slightly raised the odds of a June quarter percentage point rate cut, with the market-implied probability now just above 70%, according to the CME Group’s FedWatch gauge. Markets expect two cuts by the end of the year, though the odds for a third reduction have risen in recent days.

Though the public more closely follows the consumer price index, released earlier in the month by the Bureau of Labor Statistics, the Fed prefers the PCE measure because it is broader based, adjusts for changes in consumer behavior and places considerably less emphasis on housing costs.

The CPI for January showed an all-items inflation rate of 3% and 3.3% at the core.

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The Fed’s preferred inflation gauge cooled last month, but consumer spending sank

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The Federal Reserve’s preferred inflation gauge cooled as expected in January; however, the good news came with a red flag for the US economic engine: Consumers pulled back their spending by the most in nearly four years.

The Personal Consumption Expenditures price index rose 2.5% in January from the year before, slowing from December’s 2.6% annual rate, according to Commerce Department data released Friday.

Consumer spending was expected to drop off in January: There’s typically a post-holiday expenditure hangover to start the year; plus, last month’s retail sales data came in far below forecasts.

But consumers pulled back far more than economists expected. Spending fell 0.2% for the month from December, and adjusted for inflation, spending sank 0.5%. Those are the biggest monthly drops since February 2021.

The cost of food (especially eggs) and energy pushed up the Consumer Price Index and Producer Price Index readings for January. That had economists expecting PCE would rise about 0.3% from December but that the annual rate would slow to 2.5% from the initially reported 2.6%, FactSet estimates show.

Excluding food and energy prices, which tend to be more volatile, the closely watched core PCE price index rose 0.3% for the month and 2.6% from a year before, slowing from 2.9% in December.

Friday’s reading puts inflation within striking distance of the Fed’s 2% target and indicates that some disinflationary trends are still in play.

However, close only counts in horseshoes and hand grenades.

The Fed itself indicated that it could take until 2027 for the pace of price hikes to stabilize at that 2% level.

And in the meantime, prices remain elevated, and the cumulative effects of high inflation continue to weigh heavily on Americans, especially those who have little wiggle room in their monthly budgets. As of December 2024, prices were 10% higher than their pre-pandemic trend, new data from the Federal Reserve Bank of St. Louis shows.

Not only do price pressures remain, but a slew of recent data indicates that the US economy is indeed softening: GDP growth is slowing; business investment has been sluggish; consumer sentiment has soured; jobless claims are picking up; and inflation expectations are on the rise.

“Consumers are scrambling to process the winds of change coming out of Washington, and have apparently decided to sit it out and wait,” Christopher Rupkey, chief economist at FwdBonds, wrote in a note to investors on Friday.

To be sure, the personal saving rate skyrocketed in January, jumping to 4.6% from 3.5%, Friday’s report showed.

While uncertainty has swelled in part because of the shock-and-awe policy moves from the Trump administration, it remains to be seen how actions such as steep and broad tariffs, mass deportations, and the shrinking of the federal workforce could affect the broader economy.

The pullback in spending comes at a time when American consumers are growing increasingly pessimistic on fears that inflation will pick up because of President Donald Trump’s talk of wide-ranging tariffs, according to various surveys.

Trump has floated reciprocal tariffs on America’s trading partners and 25% duties on Mexico and Canada as well as an additional 10% tariff on Chinese goods.

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The University of Michigan’s February consumer survey showed that long-run inflation expectations surged to their highest level in nearly three decades.

The concern with higher inflation expectations is that they can be self-fulfilling to some extent: If consumers anticipate that prices will remain high, they might pull the trigger on large purchases and demand higher wages, and businesses might raise prices in response. Fed officials have expressed in recent speeches that it’s crucial for people to keep faith that inflation will eventually return to normal in the long run.

However, recent data has indicated shifts in purchases made by consumers and businesses — likely tied to uncertainty around tariffs.

This story is developing and will be updated.

CNN’s Bryan Mena contributed reporting.

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US consumers cut spending in January more drastically than at any point in the last four years

Customers wait in line for eggs at a Costco store in the Van Nuys section of Los Angeles on Wednesday, Feb. 19, 2025. (AP Photo/Richard Vogel, File)

WASHINGTON (AP) — U.S. consumers cut back sharply on spending last month, the most since February 2021, even as inflation declined, though stiff tariffs threatened by the White House could disrupt that progress.

Americans cut their spending by 0.2% in January from the previous month, the Commerce Department said Friday, likely in part because of unseasonably cold weather. Yet the retreat may be hinting at more caution by consumers amid rising economic uncertainty.

Inflation declined to 2.5% in January compared with a year earlier, down from 2.6% in December, the government said. Excluding the volatile food and energy categories, core prices dropped to 2.6%, the lowest since June, from 2.9%.

One other bright spot in the report was that incomes jumped 0.9% in January from December, fueled in part by a large annual cost of living adjustment for Social Security beneficiaries.

Inflation spiked in 2022 to its highest level in four decades, propelling President Donald Trump to the White House and causing the Federal Reserve to rapidly raise interest rates to tame prices. It has since fallen from a peak of 7.2%.

Last month’s decline could reassure Fed officials that inflation is still slowly cooling. The Fed prefers Friday’s measure to the more widely-known consumer price index, which rose for the fourth straight month in January to 3%. Friday’s gauge calculates inflation slightly differently: For example, it puts less weight on the costs of housing and used cars.

Even so, the key question preoccupying many American consumers, investors, and business executives is whether Trump’s extensive tariff proposals will push prices higher in the coming months. Trump said Thursday he will double his recently-announced tariffs on Chinese imports to 20%, and will impose 25% import taxes on Canada and Mexico next Tuesday. The three countries are the United States’ top trading partners.

Trump is also calling for widespread layoffs of federal workers, which could cause hundreds of thousands of job losses and potentially lift the unemployment rate.

“Increased uncertainty surrounding trade, fiscal and regulatory policy is casting a shadow over the outlook,” said Lydia Boussour, a senior economist at accounting and consulting firm EY.

Americans also likely cut back on their spending after a healthy winter holiday season that saw a surge in credit card debt in December, economists noted.

On a monthly basis, prices rose 0.3% in January from the previous month, matching December’s 0.3% increase. Core prices rose 0.3%, up from 0.2% in December. If sustained, January’s increases would keep inflation running above the Fed’s target. The Fed pays more attention to core prices because they provide a better read of future inflation.

A big concern right now is whether tariffs will push up inflation, or slow the economy, or — in a particularly toxic combination — both.

A report from the Federal Reserve’s Boston branch this month concluded that 25% tariffs on Canada and Mexico, along with Trump’s initial 10% import taxes on China, could lift core inflation by as much as 0.8 percentage points.

The last time Trump imposed tariffs in 2018-19, inflation was largely unaffected — but those tariffs were on a much narrower range of goods. And the economy still slowed, prompting the Fed to cut interest rates.

Worries about tariffs pushing prices higher have sent consumer confidence plunging, unwinding the modest gains that had occurred after the election. Americans are also expecting inflation to move higher in the coming months. That’s a risky trend because if consumers and businesses expect higher prices, they may act in ways to lift inflation, such as accelerating their purchases and boosting demand.