Here is the Latest Inflation Data the Fed Will Be Scrutinizing

When it comes to interest rates falling, eventually that has to involve the Federal Reserve. The central bank, as its top officials keep saying, look at data. Maybe the most important for them is personal incomes and outlays from the Bureau of Economic Analysis. The immediate good news is that things came in as expected, compared to the median forecast of economists that the Wall Street Journal polled.

“Personal income increased $233.7 billion (1.0 percent at a monthly rate) in January, according to estimates released today by the Bureau of Economic Analysis,” they wrote. “Disposable personal income (DPI), personal income less personal current taxes, increased $67.6 billion (0.3 percent) and personal consumption expenditures (PCE) increased $43.9 billion (0.2 percent).

Then the PCE price index was up 0.3% month-over-month. The core PCE index — without food or energy, eliminating the typically more volatile components to get a better view of trends — was up 0.4%. “Real DPI [adjusted for inflation] decreased less than 0.1 percent in January and real PCE decreased 0.1 percent; goods decreased 1.1 percent and services increased 0.4 percent,” they said.

Sam Millette, director of fixed income for Commonwealth Financial Network, noted via email that year-over year, “core PCE growth fell from 2.9 percent in December to 2.8 percent in January, which marks the lowest level in over 2 years.”

“Core inflation was 2.8% in January, signifying the Fed must remain patient in its quest to ease inflation pressures in the economy,” wrote Jeffrey Roach, chief economist for LPL Financial, in an email note. “The narrative has not changed that the next move by the Fed will be a cut in rates but the persistence of services inflation likely pushes out the timing of that first cut.” A slowdown in real disposable income would be a potential sign that “consumers are nearing the end of their spending splurge.”

But that wouldn’t be all good news. About 68% of GDP is consumer spending, and negative growth in the economy might be a sign of impending recession, especially if unemployment were to start rising too fast. The Sahm rule, developed by consulting economist Claudia Sahm when she worked at the Fed, is an heuristic signaling the beginning of a recession when the unemployment rate rises 0.5 percentage points or more over the minimum of the three-month averages during the previous 12 months. Not universal law, but a good predictor since the end of World War II.

BMO Economics, in an emailed note, took the developments as “unwelcome news,” as the 0.3% was up from a revised 0.1% in December. “This was the highest monthly inflation reading on this measure since September,” they wrote. “Driving the price increases last month, services increased 0.6% and food prices jumped 0.5%, even as energy and goods prices declined 1.4% and 0.2%, respectively. Core PCE prices, excluding food and energy, accelerated even more than the headline reading, by 0.4% after a modest 0.1% increase in December. This was the highest reading on monthly core PCE inflation since January of last year.”

In that view, the chance of a postponed rate cut might have risen.