Inflation showed a modest decline in January, even as concerns grew over President Donald Trump’s proposed tariffs.
The personal consumption expenditures (PCE) price index, which serves as the Federal Reserve’s preferred inflation gauge, rose 0.3% for the month and registered a 2.5% annual increase, according to data released by the Commerce Department on Friday.
Excluding food and energy, the core PCE index—a key measure for Fed officials—also increased 0.3% monthly, bringing its annual rate to 2.6%, a slight decline from 2.9% in December.
Income rises, but spending declines
The report also revealed unexpected shifts in income and spending.
Personal income surged 0.9% for the month, significantly outpacing the forecasted 0.4% increase.
However, this rise in earnings did not translate into higher consumer spending, which instead declined by 0.2%, missing expectations of a 0.1% gain.
The personal savings rate climbed to 4.6%, suggesting that consumers may be adopting a more cautious approach to their finances despite rising incomes.
The weak consumer spending likely reflected the fading impact of front-loading purchases, as well as adverse weather conditions, including unseasonably cold temperatures and widespread snowstorms.
Additionally, wildfires in Los Angeles may have further dampened spending.
Severe winter storms also disrupted homebuilding and contributed to slower job growth last month.
The data align with expectations for a first-quarter economic slowdown, with most GDP estimates for the January-March period falling below a 2.0% annualized rate. This follows 2.3% growth in the fourth quarter.
Fed rate cut expectations rise
The data comes as Federal Reserve policymakers weigh their next move regarding interest rates.
While recent statements from Fed officials have expressed confidence that inflation is gradually moving lower, they have emphasized the need for more consistent evidence before making any adjustments to monetary policy.
Stock market futures reacted positively following the report, while Treasury yields edged lower.
In January, goods prices increased by 0.5%, largely driven by a 0.9% rise in motor vehicles and a 2% jump in gasoline prices.
Meanwhile, services prices rose by 0.2%, with housing costs seeing a 0.3% increase.
Despite these gains, the overall trend in inflation remains supportive of a potential shift in the Fed’s policy stance later in the year.
Following the report, traders slightly increased the odds of a rate cut in June, with market-implied probabilities rising to just over 70%, according to the CME Group’s FedWatch gauge.
While markets are still pricing in two rate cuts before the end of the year, expectations for a third reduction have gained traction in recent days.
Although the consumer price index (CPI)—released earlier in the month by the Bureau of Labor Statistics—tends to draw more public attention, the Fed prefers the PCE index due to its broader coverage, ability to adjust for changing consumer habits, and lower emphasis on housing costs.
For comparison, the January CPI report showed a 3% annual inflation rate, with core CPI at 3.3%.
Minutes from the Federal Reserve’s January 28-29 policy meeting, released last week, indicated concerns among policymakers about inflation risks tied to Trump’s initial policy proposals.
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