PCE Data In Focus, Analysts Make U-Turn After January PCE Data Is Released?


The Fed's preferred inflation gauge posted its slowest annual increase since March 2021 in January, in line with Wall Street forecasts, while monthly prices rose at the fastest rate in a year.

The Core Personal Expenditure Index (PCE), which strips out food and energy costs and is closely monitored by the Federal Reserve, rose 2.8% from a year ago in January, the lowest annual increase since a 2.2% increase in March 2021.

Compared to the previous month, core PCE rose 0.4%, the most since January 2023 and an improvement from the 0.1% increase seen in December. Core PCE, which includes all categories, registered an increase of 2.4% from a year ago, slowing from last month's 2.6%.

"Fed officials have signaled that they don't need better news on inflation to cut rates, just continued good news," Michael Pearce, US economist chief deputy chief economist at Oxford Economics wrote in a note to clients. "With the inflation trend still down, a gradual rate reduction this year is still on the table."

The data comes at an important time in the inflation narrative after another reading on rising prices, the Consumer Price Index (CPI), recently showed prices rose faster than expected in January. The warmer-than-expected report sent stocks lower and prompted investors to adjust their expectations for interest rate cuts.

The market is now pricing in three rate cuts for 2024, in line with the Fed's latest forecast and down from the previous consensus of six cuts seen in December, according to Bloomberg data. Prior to Thursday's report, investors had placed a 58% probability of the Fed's first interest rate cut as early as June.

The latest minutes from the Federal Reserve's January meeting show most policymakers are concerned about the risk of "moving too quickly" when lowering interest rates. In general, the lawmakers have stated in their latest comments that they want "more confidence," about the decline in inflation.