Fed inflation gauge indicates big changes in key economic driver

A key economic-growth driver is slowing, but inflation remains firmly ahead of the Fed's preferred target.

Feb 28, 2025 - 14:57
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Fed inflation gauge indicates big changes in key economic driver

The Federal Reserve's preferred inflation gauge eased modestly last month, but personal-spending figures showed one of the biggest pullbacks in more than a year, suggesting further weakness in the domestic economy. 

The Bureau of Economic Analysis's PCE Price Index report for January, released Friday, showed core prices rising at an annual rate of 2.6%, down from the December reading of 2.9% and matching Wall Street's consensus forecast.

Core price pressures, which strip away volatile food and energy components, were up 0.3% on the month, compared with December's 0.2% increase and matching Wall Street's consensus estimate of 0.3%.

Markets focus on the core PCE inflation reading, which the Fed considers a more accurate representation of overall price pressures as it incorporates changes in consumer-spending patterns.

The BEA's headline PCE inflation index quickened to an annual rate of 2.5%, matching Wall Street's estimate and slightly below the 2.6% pace recorded in December. The BEA said prices rose 0.3% on the month, following a 0.3% reading in December.

The BEA also noted that personal incomes for January rose 0.9%, more than double Wall Street's estimate and the 0.3% forecast, while spending slumped 0.2% compared with the 0.7% advance in the prior month.

Fed Chairman Jerome Powell has said the central bank is in "no hurry" to lower its benchmark lending rate. 

Olivier Douliery/Bloomberg via Getty Images

A slowdown in consumer spending, which was also evident in the Commerce Department's January reading of retail sales, is crucial for an economy that relies on the services sector for around two-thirds of its growth. 

U.S. stocks were little changed following the data release, with futures indicating a 20-point opening bell gain for the S&P 500 and a 235-point advance for the Dow Jones Industrial Average. The tech-focused Nasdaq is called 30 points higher.

Benchmark 10-year-note yields were 2 basis points higher at 4.275% following the data release, while 2-year notes rose 2 basis points to 4.069%.

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The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.05% higher at 107.276.

Earlier this month, the Commerce Department's January CPI inflation report showed a headline reading of 3%, with core pressures quickening to 3.3% and pegged at the highest rate since May.

Since then consumer and market-based inflation expectations have moved notably higher in advance of the impact of the Trump administration's planned tariffs on goods from Canada and Mexico and increased levies on imports from China. 

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"Concerns of an economic slowdown brought on by potential tariffs, stickier inflation, and the possibility of higher-for-longer interest rates, coupled with a meaningful pullback in the technology sector, namely AI-related stocks, has dented sentiment in recent weeks," said George Smith, portfolio strategist at LPL Financial.

Bets on a Fed response, meanwhile, are starting to develop, with CME Group's FedWatch tool now pricing in two quarter-point rate cuts for the year, one in June and the other in October. 

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