Inflation, incomes rose in January as Fed weighs rate cuts

Inflation and personal incomes rose in January, according to federal data released Thursday, another sign of economic strength that could delay long-anticipated interest rate cuts.

The personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, rose 0.3 percent in January and 2.4 percent over the past 12 months.

Monthly inflation picked up slightly from December, when the PCE index rose 0.1 percent, even as the annual inflation rate fell from 2.6 percent in the final month of 2023.

Inflation without volatile food and energy prices, known as “core” inflation, sped up to 0.4 percent gain in January after rising 0.2 percent in December. Annual core inflation fell to 2.8 percent last month from 2.9 percent in December.

The slight increase in inflation came in line with economists’ expectations following a remarkably strong January jobs report and hotter-than-expected consumer price index inflation data.

A 1-percent January increase in personal incomes, however, defied economists’ projections of a 0.4 percent rise last month, according to consensus estimates.

While inflation has fallen sharply from four-decade highs in 2022, it still remains notably above the Fed’s annual target of 2 percent. The recent run of strong economic data will likely dissuade the Fed from cutting rates and adding more fuel to the economy.

Elizabeth Renter, data analyst at NerdWallet, said the February jobs report set to be released next Friday could be the final nail in the coffin of a March rate cut.

“If next week’s labor market data continues to show strength amidst monetary policy tightening … central bankers will likely feel comfortable holding rates higher, possibly into June, to ensure inflation continues a downward trend,” Renter said in an analysis.

“They don’t want to break something — squeezing the economy to quell price growth at the risk of a recession — but the focus is still getting inflation to 2%.”

The Fed’s efforts to acheive a soft landing from high inflation could have implications for the November elections and President Biden’s attempt to sell voters on his economic record.

Biden and Democratic lawmakers are hopeful that a combination of falling inflation and looser interest rates will relieve the financial pressure many American households face, despite low unemployment and strong wage growth.

Former President Trump, however, is eager to use high inflation as a cudgel against Biden while attempting to take credit for run of new stock market records.

Updated at 9:38 a.m. ET