On Friday, the US Department of Commerce reported that its core Personal Consumption Expenditures (PCE) price index increased 0.6% in January, up from December's revised reading of 0.4%. This reading was higher than expected, as analysts had predicted a rise of only 0.4%. This indicates that inflation is increasing and could lead the Federal Reserve (Fed) to tighten its monetary policy, which would increase the value of the US Dollar.
In January, the PCE-price index increased by 0.6% from the previous month. Core prices increased by 0.6% in January from December, which had seen a 0.4% increase. Economists believe that the core measure is a more accurate forecaster of inflation in the future.
Over the last year, core Personal Consumption Expenditures (PCE), which is the Federal Reserve's favored gauge of inflation, increased 4.7%, up from the 4.6% increase reported in December. It was anticipated by economists that the yearly inflation rate would increase by only 4.3%.
The US Bureau of Economic Analysis also said that personal income increased 0.6% in January, up from 0.2% in December, but missed expectations as economists were looking for a 1% increase. Personal spending increased by 1.8%, higher than the expected 1.4%.
It is anticipated that the Federal Reserve will increase a key short-term interest rate a few more times this year, thus limiting consumer spending. It is now expected that the markets will experience 25-bp rate increases in March, May, and June. The CME FedWatch tool estimates the likelihood of a 25-bp rate increase to 5.25%-5.50% as 51.9%, and the probability of 5.50%-5.75% as 23.5%.
Inflation readings that are increasing indicate that the Federal Reserve will probably maintain higher rates for a longer period of time, which is not advantageous for the possibility of avoiding a recession in the economy. The CME Group's FedWatch tool, which uses futures contract prices from the short-term market targeted by the Federal Reserve, currently estimates the chance of a quarter percentage point increase at around 67%. Around one-third of people, with the figure increasing, believe the Federal Reserve will raise rates by 0.5% based on the most recent reports.
Markets are closed Monday in observance of President’s Day.
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