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US inflation eased to 2.4 per cent in the year to January, according to the metric that the Federal Reserve uses for its inflation target, supporting expectations of rate cuts later this year.
Thursday’s data on personal consumption expenditures, the US central bank’s benchmark gauge of price pressures, matched economists’ expectations for 2.4 per cent in a Bloomberg survey.
The fall from December’s rate of 2.6 per cent backs expectations that the Fed will cut rates from their current 23-year highs around the middle of this year.
“This was a benign number,” said Peter Tchir, head of macro strategy at Academy Securities, an investment bank. “There was worry in the market that this was going to be hotter than expected, but it didn’t materialise.”
The core rate for PCE, which excludes changes in food and energy prices and is the Fed’s preferred measure of underlying inflation, was also in line with expectations at 2.8 per cent.
The month-on-month core measure reached 0.4 per cent, up from 0.1 per cent in December, while the equivalent rate for headline PCE was 0.3 per cent, up from 0.1 per cent in December but in line with expectations.
The S&P 500 was up 0.3 per cent in afternoon trading on Thursday. The two-year Treasury yield — which moves with interest rate expectations — fell following the news, leaving it 0.03 percentage points lower on the day at 4.62 per cent.
Traders in the market are still pricing in between three and four interest rate cuts this year.
The headline PCE figure, the metric for the Fed’s 2 per cent target, was the lowest for almost three years. It compared with a peak of 7.1 per cent in June 2022 after Russia began its full-scale invasion of Ukraine.
The “supercore” rate, which strips out changes in housing prices, rose 0.6 per cent.
Andrew Hollenhorst, economist at US bank Citi, described the supercore figure as “troubling”, warning: “Higher inflation and higher policy rates today increase the probability of a recession later this year.”
However, Paul Ashworth, economist at Capital Economics, said the high figure for the supercore rate was “principally due to outsized gains in portfolio management prices”, largely a result of “the recent strong performance of the stock market . . . which we think was an anomaly”.
Thursday’s figures from the Bureau of Economic Analysis are separate to the US’s consumer price index, which rose 3.1 per cent in the year to January.
The Fed is unwilling to lower borrowing costs from current levels of 5.25 per cent to 5.5 per cent until it is confident price pressures have sustainably returned to the 2 per cent target.
Bill Diviney, senior US economist at ABN Amro, said that leading indicators for inflation, such as rent and used car prices, “suggest disinflation will continue over the coming months”.
He added: “We continue to think PCE inflation will be broadly back at the Fed’s . . . target by June, when we expect the Fed to begin lowering rates.”
Source: Economy - ft.com
