Fed’s preferred inflation gauge rises in January, before Iran war

Inflation pressures before the Iran war

The Federal Reserve’s closely watched inflation gauge moved higher in January, according to a report from the Commerce Department released Friday. The increase came before the Iran war began Feb. 28 and disrupted energy markets, adding to signals that prices remained persistently elevated at the start of the year.

The report said prices rose 2.8% in January compared with a year earlier, slightly below December’s increase. The Commerce Department said the report was delayed because of last fall’s six-week government shutdown, which created a backlog of data that is now nearly cleared.

Core inflation remains elevated

Excluding volatile food and energy categories that the Fed pays closer attention to, core prices rose 3.1% in January from a year earlier. That was up from 3.0% in the prior month and was the highest core increase in nearly two years, the report said.

On a monthly basis, prices rose 0.3% in January. Core prices jumped 0.4% for the second straight month, a pace that if sustained would lift inflation well above the 2% annual target set by the Fed.

Consumers and incomes rose in January

The Commerce Department report also showed that consumer spending rose 0.4% in January, matching December’s increase. It added that incomes rose 0.4% and that after-tax incomes jumped 0.9% in January, a positive sign that consumers did not have to dip into savings to sustain spending.

The report attributed part of the after-tax income gain to a large increase in Social Security benefit payments after a cost-of-living adjustment took effect at the start of the year.

PCE vs CPI, and why the PCE ran hotter

Friday’s inflation report included the personal consumption expenditures price index, a measure separate from the consumer price index that was reported on Wednesday. The report said the PCE index has been running hotter than the CPI, largely because it places much less weight on rental costs, which have been cooling steadily in recent months.

The report also said the PCE index typically runs below the CPI, but has pulled ahead of it in the past few months.

Energy shock from the Iran war likely to hit later data

Since the PCE data were released, the picture has been complicated by the Iran war’s effect on energy costs. The AP report said the conflict shut down the Strait of Hormuz and cut off one-fifth of the world’s oil supply.

It said oil prices have surged more than 40% since the war began, and that gas prices have risen to $3.60 a gallon from just under $3 a month earlier, citing AAA. Economists forecast that the energy price moves are likely to cause inflation to spike in March and potentially April.

Fed policy remains restrictive as it weighs the next meeting

The report said Fed policymakers have kept their key interest rate elevated to slow borrowing, spending and growth in an effort to cool inflation further. It said the Fed meets next week and is widely expected to keep its rate unchanged, with policymakers looking at the conflict in the Middle East as a near-term inflation factor.