Fed's favored inflation gauge remained stubbornly high in January as consumer price pressures persist

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The Federal Reserve’s preferred inflation gauge remained stubbornly high in January as consumers continued to face elevated price growth.

The Commerce Department on Friday reported that the personal consumption expenditures (PCE) index rose 0.3% on a monthly basis in January and is up 2.8% from a year ago. The monthly figure was in-line with the expectations of economists polled by LSEG, while the annual figure was slightly lower than the 2.9% estimate.

Core PCE, which excludes volatile measurements of food and energy prices, was up 0.4% from a month ago and increased 3.1% year over year. Both figures were in line with economists’ expectations from the LSEG poll.

Federal Reserve policymakers are focusing on the PCE headline figure as they try to bring inflation back to their long-run target of 2%, though they view core data as a better indicator of inflation. Compared with December’s readings, headline PCE inflation declined slightly from 2.9% while core PCE rose from 3%.

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Prices for goods were up 1.3% in January on an annual basis, down from 1.7% in December. Goods prices increases were even lower last summer, when the index posted annual gains of 0.6% in June and July and 0.9% in August.

Durable goods prices increased 2.2% in January from a year ago, up from a 2.1% reading in December. The index was close to 1% from June through November. Nondurable goods prices rose just 0.8% in January, a decline from the 1.6% annual rate recorded in December and the lowest reading since August.

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PCE inflation was up 2.8% from a year ago, while core PCE is 3.1% higher. (Michael Nagle/Bloomberg via Getty Images / Getty Images)

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Services prices were up 3.5% from a year ago in January. That’s up slightly from the 3.4% services inflation rate that persisted from September through December.

The personal savings rate as a percentage of disposable personal income was 4.5% in January. That represents an increase from the 4% savings rate that prevailed from October through December, and is also the highest reading for the index since it was last at 4.5% in July.

What experts are saying

“Income and consumption looked positive during the first month of the year, but inflation will remain a concern for monetary policy going forward, especially due to the recent increase in oil and gasoline prices,” said Raymond James chief economist Eugenio Aleman.

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Jeffrey Roach, chief economist at LPL Financial, said that with the PCE inflation data showing a 0.3% monthly increase, investors “need to see monthly prints stay consistently in the range of 0.1% and 0.2% before they can realistically believe inflation risks are mostly contained.”

“Underlying inflation pressures will continue to boil under the surface and next month’s print will also be impacted by the war in the Middle East. We expect the Fed to highlight the uncertainty on both sides of the mandate. Inflation will be impacted by the war and unemployment will be impacted by the disruptions in the labor market,” Roach added.

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Federal Reserve Chair Jerome Powell and central bank policymakers will meet next week. (Chip Somodevilla/Getty Images)

What does it mean for the Fed?

Federal Reserve policymakers are set to hold a monetary policy meeting next week on March 17-18, when the Federal Open Market Committee will announce its decision on interest rates.

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The market expects the Fed to hold the benchmark federal funds rate steady at its current range of 3.5% to 3.75%, with the CME FedWatch tool showing a 99.1% probability of the Fed leaving rates unchanged – up from 96.5% a week ago and 90.8% a year ago.