Economy

US stocks have recorded their biggest weekly fall in more than two months, declining further on Friday after traders were shaken by the latest evidence of stubbornly high inflation in the world’s largest economy.The S&P 500 index closed down 1.1 per cent in New York, bringing its losses for the week to 2.7 per cent. The tech-heavy Nasdaq Composite was 1.7 per cent lower for the day, for a 3.3 per cent decline for the week. The weekly declines were the sharpest since early December.After an unexpectedly strong start to the year, US stocks have now declined for three consecutive weeks. Recent economic data has increased expectations that the Federal Reserve will have to hold interest rates at higher rates for an extended period to bring inflation back towards its 2 per cent target, putting pressure on equity valuations.Central bank officials have repeatedly warned that rates would be high for some time, but Jonathan Golub, chief US market strategist at Credit Suisse, said “the market wasn’t listening” until the recent data convinced them.The most recent disappointment came on Friday as data showed core monthly personal consumption expenditures — the Fed’s preferred measure of inflation — rose more than expected in January. Prices increased 0.6 per cent month on month, and 4.7 per cent year on year — substantially more than average forecasts of a 4.3 per cent annual rise.“The market is now beginning to discount a different kind of backdrop” featuring a combination of stubborn inflation and weak economic growth, said Golub. “It’s ‘stagflation lite’.”Friday’s figures followed strong labour market, consumer price and retail spending data released earlier this month.Susan Collins, president of the Federal Reserve Bank of Boston, said on Friday that the data “reinforce my view that we have more work to do to bring inflation down to the 2 per cent target.“I anticipate further rate increases to reach a sufficiently restrictive level, and then holding there for some, perhaps extended, time.”US Treasuries sold off alongside stocks, with the yield on the interest rate-sensitive two-year note rising 0.12 percentage points to 4.81 per cent, the highest since June 2007. Yields rise when prices fall. The 10-year Treasury yield climbed 0.07 percentage points to 3.95 per cent.Markets are now pricing in a rise in the benchmark federal-funds rate to between 5.25 per cent and 5.5 per cent by July — more than half a percentage point higher than where investors thought rates would peak at the start of February.European stocks also dropped on Friday. The region-wide Stoxx 600 fell 1 per cent, while London’s FTSE 100 dipped 0.4 per cent.Germany’s Dax declined 1.7 per cent and the French CAC 40 was down 1.8 per cent.Investors are also concerned that the European Central Bank will lift rates further. Joachim Nagel, president of the Bundesbank and a member of the ECB’s governing council, said on Friday that inflation was likely to “remain at very high levels”, requiring “significant interest rate hikes beyond March”.Earlier in Asia, the Hang Seng index fell 1.7 per cent, while China’s CSI 300 lost 1 per cent. Although ecommerce group Alibaba beat analysts’ expectations with its fourth-quarter earnings, its shares fell 5.4 per cent, suggesting investor skittishness over China’s economy despite the government easing Covid-19 restrictions.The dollar index, which measures the greenback against a basket of six peers, rose 0.6 per cent. More

WASHINGTON (Reuters) – U.S. consumer spending increased by the most in nearly two years in January amid a surge in wage gains, while inflation accelerated, adding to financial market fears that the Federal Reserve could continue raising interest rates into summer.The report from the Commerce Department on Friday was the latest indication that the economy was nowhere near a much-dreaded recession. It joined data earlier this month showing robust job growth in January and the lowest unemployment rate in more than 53 years.”Clearly, tighter monetary policy has yet to fully impact consumers and shows that the Fed has more work to do in slowing down aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial (NASDAQ:LPLA) in Charlotte, North Carolina. “This report all but insures the Fed will continue on its rate hiking campaign for a lot longer than markets anticipated just a few weeks ago.”Consumer spending, which accounts for more than two-thirds of U.S. economic activity, shot up 1.8% last month. That was the largest increase since March 2021. Data for December was revised higher to show spending dipping 0.1% instead of falling 0.2% as previously reported. Economists polled by Reuters had forecast consumer spending rebounding 1.3%.Graphic: Personal consumption https://www.reuters.com/graphics/USA-STOCKS/egvbyomrzpq/pce.png When adjusted for inflation, consumer spending increased 1.1%, also the biggest gain since March 2021. The so-called real consumer spending had declined in November and December.Consumers boosted purchases of long-lasting manufactured goods like motor vehicles, household furnishings and equipment as well as recreational goods and vehicles. They also bought clothes. Goods outlays rebounded 2.8%. Spending on services was also strong, rising 1.3% as Americans frequented restaurants and bars. There were increases in spending on healthcare, recreation and transportation services.The overall surge in spending came as wages and salaries jumped 0.9%. An 8.7% cost of living adjustment, the biggest increase since 1981, for more than 65 million Social Security beneficiaries offset a drop in government social benefits. That reflected the expiration of the extended child tax credit. Spending was also likely flattered by difficulties ironing out seasonal fluctuations from the data at the start of the year. Some economists expect payback in February. Nevertheless, the strong performance put consumer spending on a higher growth path at the start of the first quarter. Consumer spending slowed in the fourth quarter, with most of the loss in momentum happening in the last two months of 2022.The data together with another Commerce Department report showing new home sales vaulting 7.2% in January prompted Goldman Sachs (NYSE:GS) to raise its first-quarter gross domestic product tracking estimate by 0.4 percentage point to a 1.8% annualized rate. The economy grew at a 2.7% pace in the fourth quarter. Stocks on Wall Street fell. The dollar firmed against a basket of currencies. U.S. Treasury yields rose.Graphic: New home sales https://www.reuters.com/graphics/USA-STOCKS/byprlqrgwpe/nhs.png MORE RATE HIKESFinancial markets have been on edge since the release of January’s blockbuster employment report.The Fed is expected to deliver two additional rate hikes of 25 basis points in March and May. Traders on Friday raised their bets for another increase in June. The U.S. central bank has raised its policy rate by 450 basis points since last March from near zero to a 4.50%-4.75% range.The personal consumption expenditures (PCE) price index shot up 0.6% last month, the largest increase since June 2022, after gaining 0.2% in December. In the 12 months through January, the PCE price index accelerated 5.4% after rising 5.3% in December.Excluding the volatile food and energy components, the PCE price index increased 0.6%. That was the biggest gain since August 2022 and followed a 0.4% rise in December. The so-called core PCE price index increased 4.7% on a year-on-year basis in January after advancing 4.6% in December.The Fed tracks the PCE price indexes for monetary policy. According economists’ calculations, core services prices excluding housing, which are being closely watched by policymakers, increased 0.6% after climbing 0.4% in December.The rise in inflation reflects upgrades to consumer and producer prices in annual revisions published this month. Businesses also push through price increases at the beginning of the year. The latest high readings left economists to expect that the road to disinflation would be slow and bumpy, with a survey from the University of Michigan on Friday showing consumers’ near-term inflation expectations increased in February.Graphic: UMich inflation expectations https://www.reuters.com/graphics/USA-STOCKS/lgpdkolddvo/umichinflation.png But some believe the year-on-year PCE price data will be revised lower when the Commerce Department’s Bureau of Economic Analysis (BEA) publishes its annual revisions to the series later this year. The year-on-year CPI and PPI data were not impacted by the annual revision.”But so far the PCE price data are only getting the upward revision from the annual revisions to the underlying source data from recent months without getting the offsetting downward revisions to earlier months,” said Daniel Silver, an economist at JPMorgan (NYSE:JPM) in New York. “This means that year-ago rates for the PCE price data in recent months are ‘too high’ right now and likely will be revised down in the BEA’s own annual revision coming in the fall.”Personal income increased a solid 0.6%, the bulk of it coming from strong wage growth. Income at the disposal of households after adjusting for inflation surged 1.4%, the largest increase since March 2021. Disposable income was also boosted by a 7.9% drop in tax payments.Consumers increased savings even as they stepped up spending. The saving rate rose to 4.7%, the highest in a year, from 4.5% in December. “Households are drawing down excess savings at a slower rate than before, likely due to recession concerns,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. More

Russia’s invasion of Ukraine a year ago reverberated through global markets. With no end in sight to Europe’s most intense conflict since the second world war, the effects are still being felt.Financial Times reporters look at what has occurred in key markets and what might happen next.Putin’s energy war backfiresRunning almost in parallel to Russia’s invasion of Ukraine has been the energy war President Vladimir Putin unleashed against Europe. The squeeze on gas supplies started earlier, in what many industry commentators now believe was an attempt to weaken Europe’s resolve before the first shots were even fired. But Moscow’s weaponisation of gas supplies ramped up dramatically as western powers threw their support behind Kyiv.Russian gas exports, which once met about 40 per cent of Europe’s demand, have been cut by more than three-quarters to EU countries in the past year, stoking an energy crisis across the continent.But Putin’s energy war is no longer going to plan. Senior figures in the industry believe that for all Russia’s undoubted sway in oil and gas markets, the president is now staring at defeat in markets he once thought he could dominate.“Russia played the energy card and it did not win,” Fatih Birol, head of the International Energy Agency, told the Financial Times this week.“It wasn’t just meant to cause pain in Europe for its own sake it was designed to change European policy,” said Laurent Ruseckas, executive director at S&P Global Commodity Insights. “If anything, it made Europe more determined not to be bullied into changing positions.”European gas prices have fallen by 85 per cent from their August peak, bolstering the wider economy, which now looks likely to avoid a deep recession.The continent has also avoided the worst potential outcomes such as outright gas shortages or rolling blackouts, which once seemed a distinct possibility.Indeed, there are signs that Europe is now better placed to tackle next winter too.Relatively mild weather and Europe’s success in tapping alternative supplies such as seaborne liquefied natural gas mean that storage facilities across the continent are far fuller than normal for the time of year.Gas in storage stood just below 65 per cent of capacity as of Wednesday, according to trade body Gas Infrastructure Europe, with only a month of winter still to run. On the day of Russia’s invasion, gas storage stood at just 29 per cent.“The storage refill issue for next winter is no longer a big burden,” said Ruseckas.Longer-term traders including Pierre Andurand, who has run one of the world’s most successful energy funds for more than 15 years, think Putin has already lost as he has obliterated his relationship with Russia’s main gas customer. While Russia wants to sell more gas to Asia, it could take a decade to reorient its pipelines east, with the gasfields that once supplied Europe not connected to the line it uses to feed China.Andurand this month argued that China would also be in a position to force a hard bargain with Moscow on price, and would not want to repeat Europe’s mistake of becoming too reliant on any one supplier. “Once Russia can only sell gas to China, Beijing will be in a position to decide the price,” Andurand said.Europe still faces challenges. While gas prices have plummeted from the near $500 a barrel level (in oil terms) they reached in August, they remain two-to-three times higher than historical norms. Russia still supplies about 10 per cent of the continent’s gas along pipelines running through Ukraine and Turkey. Should Moscow decide to cut those supplies it is likely to push prices higher again, although it may be wary of alienating Turkey.Europe will also potentially face stiffer competition for LNG supplies with Asia this year as China’s economy reopens after the end of zero-Covid, though there is some initial evidence that Beijing is more price sensitive than feared. Traders look to extension of grain export dealInternational traders are focused on the extension of the Black Sea grain export deal between Kyiv and Moscow that is due to expire next month, amid Ukrainian accusations that Russian inspectors were deliberately delaying the transit of grain ships in the port of Istanbul.The agreement, brokered by Turkey and the UN last July, allowed Ukrainian grain shipments to flow through the Black Sea, bringing prices down from their post-invasion peaks. Grain prices have since fallen to prewar levels although they remain historically high.Ukraine had been a leading player in the food commodity markets prior to the war, accounting for about 10 per cent of the global wheat export market, just under half of the sunflower oil market and 16 per cent of the corn market.Last November, the deal was extended despite Putin’s threats to terminate it, and there is heightened uncertainty over how Moscow will act at the negotiation table.“If [the deal] is renewed — that’s great news, but if it’s not done, then immediately you’re going to have an issue there with supplies,” warned John Baffes, senior agricultural economist at the World Bank. “Those issues are going to affect mostly countries in north Africa and the Middle East.”High inflation ensures interest rates remain elevatedInflation was already elevated in February 2022, as prices were pressured higher by snarls in supply chains and the enormous fiscal stimulus unleashed to temper the worst effects of the Covid-19 pandemic. But those forces had been understood by central banks as transitory. The sanctions placed on Russia at the start of the war drove up the prices of oil, gas and coal — among other commodities — adding to inflation and rendering it more persistent. Even as supply chains were unblocked and pandemic cash was spent, inflation continued to rise. The persistence of that inflation has forced central banks to raise interest rates higher and higher, lifting yields on sovereign debt. Two-year sovereign bond yields, which move with interest rates, have risen more than 2 percentage points in Germany, the UK, the US and Australia, among others, in the last year alone. As the cost to borrow has risen for sovereign nations, so it has for companies, pushing corporate bond yields higher and stock prices lower. There’s little chance they will fall soon. Although inflation globally has begun to slow, the pace remains far above target for many central banks, which have vowed to continue their fight. Rouble set to depreciate after recovering from post-invasion lowOne year on from Russia’s invasion of Ukraine and the rouble’s value against the dollar is close to where it was at the start of the conflict — although there have been plenty of twists along the way.The Russian currency halved in value to a record low of 150 to the dollar in the month after Putin ordered troops into Ukraine, despite Russia’s central bank more than doubling interest rates to 20 per cent in late February in an attempt to calm the country’s increasingly strained financial system.European and US sanctions — designed to cut Russia out of the global payments system and freeze the hundreds of billions of dollars of reserves amassed by the Bank of Russia — swiftly followed. In late March, an emboldened US president Joe Biden declared that the rouble had been “almost immediately reduced to rubble” as a result.Then came the rebound. Moscow’s imposition of capital controls meant the rouble had recovered almost all of its losses by the start of April. The currency was also helped by the continued flow of oil and gas exports.It has gradually weakened since July, however, when it touched 51 against the dollar, a level last seen in 2015. Today it trades at 75.With Russia’s capital account all but closed for major hard currencies, “the exchange rate does not perform its forward-looking role based on expectations, it only reflects day to day trade flows, most of which is energy trade,” said Commerzbank analyst Tatha Ghose. Ghose expected the rouble to continue to depreciate against the greenback in 2023, dragged lower as western sanctions on Russian oil weigh on the country’s current account. More

The Federal Reserve building is seen before the Federal Reserve board is expected to signal plans to raise interest rates in March as it focuses on fighting inflation in Washington, January 26, 2022.
Joshua Roberts | Reuters

The Federal Reserve is unlikely to be able to bring down inflation without having to raise interest rates considerably higher, causing a recession, according to a research paper released Friday.
Former Fed Governor Frederic Mishkin is among the authors of the white paper that examines the history of central bank efforts to create disinflation.

Despite the sentiments of many current Fed officials that they can manage a “soft landing” while tackling high prices, the paper says that is unlikely to be the case.
“We find no instance in which a central-[bank]induced disinflation occurred without a recession,” said the paper, co-authored by economists Stephen Cecchetti, Michael Feroli, Peter Hooper and Kermit Schoenholtz.

The paper was presented Friday morning during a monetary policy forum presented by the University of Chicago Booth School of Business.
The Fed has implemented a series of interest rate hikes in an effort to tame inflation that had been at its highest level in some 41 years. Markets widely expect a few more hikes before the Fed can pause to assess the impact the tighter policy is having on the economy.
However, the paper suggests that there’s probably a ways to go.

“Simulations of our baseline model suggest that the Fed will need to tighten policy significantly further to achieve its inflation objective by the end of 2025,” the researchers said.
“Even assuming stable inflation expectations, our analysis casts doubt on the ability of the Fed to engineer a soft landing in which inflation returns to the 2 percent target by the end of 2025 without a mild recession,” they added.
The paper, however, rejects the idea of raising the 2% inflation standard. In addition, the researchers say the central bank should abandon its new policy framework adopted in September 2020. That change implemented “average inflation targeting,” allowing inflation to run hotter than normal in the interest of a more inclusive employment recovery.
The researchers say the Fed should go back to its preemptive mode where it started raising rates when unemployment fell sharply.
Fed Governor Philip Jefferson released a reply to the report, saying the current situation differs from previous inflation episodes. He noted that this Fed has more credibility as an inflation-fighter than some of its predecessors.
“Unlike in the late 1960s and 1970s, the Federal Reserve is addressing the outbreak in inflation promptly and forcefully to maintain that credibility and to preserve the ‘well anchored’ property of long-term inflation expectations,” Jefferson said.

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Today’s top storiesNato and US officials said China’s proposed peace plan for Ukraine was tainted by the country’s support for Russia.US core monthly personal consumption expenditure — the Federal Reserve’s preferred measure of inflation — came in at a higher than expected 0.6 per cent in January, with the year-on-year figure at 5.4 per cent, much higher than the anticipated 4.8 per cent, fuelling expectations of more interest rate rises. Economic growth for the fourth quarter was revised down yesterday from 2.9 per cent to 2.7 per cent. Minutes of the last Federal Reserve policy meeting showed it was still determined to bring inflation back to target. Recession fears returned to Germany after revised figures showed the economy shrank a more than expected 0.4 per cent in the fourth quarter.For up-to-the-minute news updates, visit our live blogGood evening.One story dominates global media today: the first anniversary of Russia’s all-out assault on Ukraine. As we catalogue across the FT site today, the war has not only brought devastation to the Ukrainian people but profound changes to the global economy.Let’s start with the energy crisis. The war brutally exposed Europe’s dependence on gas from Russia, while record oil and gas revenues helped Moscow initially weather the cost of its campaign, with a hit of just 2.1 per cent to Russian GDP in 2022. But as Europe successfully pivots to alternative sources such as seaborne liquefied natural gas and oil revenues are affected by a western embargo and a price cap, the impact on Russian government revenue — 40 per cent of which comes from energy — is likely to be substantial. The price of Brent crude meanwhile has fallen back to prewar levels.Falling prices and a mild winter have fuelled a new sense of optimism that the crisis is ending, but Fatih Birol, head of the International Energy Agency, added a note of caution in an interview with the FT yesterday: “Russia played the energy card and it did not win . . . But it would be too strong to say that Europe has won the energy battle already.”Western sanctions meanwhile continue to ratchet up, with a new raft of measures today timed to coincide with the anniversary. The US and the UK are targeting hundreds of groups and individuals including Russian banks and defence companies, while the EU and Japan are looking at ways of further damaging Moscow’s war economy.But how effective are the sanctions? Western allies are investigating sanctions dodging and in particular the surge of exports to Russia’s neighbours. An FT investigation found that Yevgeny Prigozhin, leader of the Wagner mercenary group that has played a key role in the invasion, managed to generate more than a quarter of a billion dollars from his natural resources empire despite being sanctioned way before the war. He was even able to get round UK money-laundering checks by submitting a utility bill in the name of his 81-year-old mother.Meanwhile, as today’s Moral Money newsletter (for premium subscribers) points out, many of the world’s biggest companies are still doing business in Russia, arguing fire sales would harm shareholder value. Tobacco group Philip Morris told the FT this week it would “rather keep” its operations in Russia than sell on tough Kremlin terms.Another key consequence of the war has been the damage to supply chains, and in particular on food supplies, causing global hunger to jump by almost a quarter last year, according to the UN. Food and fertiliser prices have come down from last year’s peaks but are still high.As our Behind the Money podcast explains, Ukraine’s role as one of the world’s major sources of grain, corn (a vital source of feed for livestock) and sunflower oil suddenly stopped with the invasion and Russia’s blockade of Ukraine’s ports. Although the UN and Turkey eventually brokered a deal to get grain moving again, poorer countries that rely on Ukrainian and Russian grain have been hit hard.As for Ukraine itself, the economic damage has been devastating, with GDP falling 30 per cent last year and many of its core industries badly affected. The war effort is costing it 35 per cent of GDP, threatening to turn the country into an inflationary disaster, heavily dependent on foreign aid. And despite repeated offers of support from the west, less than half the financial aid pledged has actually reached Kyiv, according to new analysis. The FT editorial board nonetheless detects grounds for hope after a year of war and praises the decision to make Ukraine an official candidate for EU membership.“Discussion is rightly starting about the postwar security guarantees Ukraine will need,” it says. “Thousands of its citizens have paid in blood to ensure independence and a ‘European future’ for their country. Ukraine deserves assurances that this is indeed the future that awaits.”Need to know: UK and Europe economyUK opposition leader Keir Starmer outlined five long-term missions for the Labour party if he wins the next election, including a pledge to make the country the fastest-growing G7 economy. Should he become prime minister, he will inherit a severely damaged public sector, according to a new report.The European Central Bank scrapped its dividend and said it made no profits in 2022 for the first time in 15 years. Analysts said the ECB risked losses in the coming years as it unwinds its quantitative easing policies.Turkey cut interest rates in an attempt to support the economy following the recent earthquakes, the latest in a series of big reductions ahead of its general election.Need to know: Global economyUS clean energy tsar John Podesta told the FT there would be “no apologies” for prioritising American jobs in the race for clean energy.The US nominated former Mastercard chief and Wall Street veteran Ajay Banga as World Bank president to oversee the institution’s upheaval and a new focus on global warming. The FT editorial board outlines the challenges ahead.South Africa and Nigeria, Africa’s two largest economies, were put on warning by the Financial Action Task Force, an anti-money laundering watchdog, over failures to fight illicit finance and organised crime.The US may be attempting a pivot towards clean energy but it first must overcome its obsession with big cars. Chief data reporter John Burn-Murdoch details how they result in high levels of air pollution and much higher road death rates than in other developed countries.Need to know: businessBASF, the world’s biggest chemicals group, is cutting 2,600 jobs and winding down several plants, blaming high energy costs in Europe.The latest signs of a rebound in travel demand came with British Airways owner International Airline Group returning to profit for the first time since the start of the pandemic and a similar announcement from Australian flag carrier Qantas. In China the revival means the rich are struggling to find private jets. London’s Heathrow airport said it had lost £684mn last year despite passenger numbers trebling.Job cuts at McKinsey and KPMG are the first concrete signs that the pandemic-fuelled boom in spending on consultants is over, thanks to soaring costs, the end of cheap money and a slump in deal activity. A hacking outfit known as the Nevada Group has tried to paralyse computer networks of almost 5,000 victims across the US and Europe in one of the most widespread ransomware attacks on record. Science round upGoogle said it had made a breakthrough in correcting for the errors that are inherent in quantum computers, a potentially significant step in overcoming the biggest technical barrier to a revolutionary new form of computing. Can robot learning be used to generate novel ideas in hard areas such as mathematics and science? Innovation editor John Thornhill is optimistic.The collision of two neutron stars in 2017 may offer us some insights into the age of the universe and unlock other astrophysical mysteries, writes science commentator Anjana Ahuja.The worst-ever outbreak of bird flu has led to the disease becoming endemic in some birds, with huge costs for the poultry industry. But how likely is a human bird flu pandemic? Read our new explainer.Some good newsYnys Enlli, an island off the coast of Wales, has become Europe’s first dark-sky sanctuary and one of the best places in the world to see the stars

Something for the weekendThe FT Weekend interactive crossword will be published here on Saturday, but in the meantime why not try today’s cryptic crossword? More

The core personal consumption expenditures price index increased 0.6% for the month, and was up 4.7% from a year ago.
Headline inflation increased 0.6% and 5.4% respectively. All the numbers were higher than estimates.
The numbers suggest inflation accelerated to start the new year, putting the Fed in a position where it likely will continue to raise interest rates.

A measure the Federal Reserve watches closely to gauge inflation rose more than expected in January, indicating the central bank has more work to do to bring down prices.
The personal consumption expenditures price index excluding food and energy increased 0.6% for the month, and was up 4.7% from a year ago, the Commerce Department reported Friday. Wall Street had been expecting respective readings of 0.5% and 4.4%. The core PCE gains were 0.4% and 4.6% in December.

Including the volatile food and energy components, headline inflation increased 0.6% and 5.4% respectively, compared to 0.2% and 5.3% in December.
Markets fell following the report, with the Dow Jones Industrial Average off around 500 points in morning trading.
“This morning’s strong inflation data continued the recent spate of market-unfriendly news. This could keep the policy rate higher for longer than the market had hoped, which in turn will likely pressure earnings,” said Matt Peron, director of research at Janus Henderson Investors. “While we do see signs that inflation will eventually moderate, higher rates for longer will take a toll.”
Consumer spending also rose more than expected as prices increased, jumping 1.8% for the month vs. the estimate for 1.4%. Adjusted for inflation, prices rose 1.1%.
Personal income adjusted for inflation increased 1.4%, higher than the 1.2% estimate. The personal saving rate also was up, rising to 4.7%.

All of the numbers suggest inflation accelerated to start the new year, putting the Fed in a position where it likely will continue to raise interest rates. The central bank has pushed benchmark rates up by 4.5 percentage points since March 2022 as inflation hit its highest level in some 41 years.
“Clearly, tighter monetary policy has yet to fully impact consumers and shows that the Fed has more work to do in slowing down aggregate demand,” said Jeffrey Roach, chief economist at LPL Financial. “The Fed may still decide to hike by 0.25 [percentage points] at the next meeting, but this report means that the Fed will likely continue hiking into the summer. Markets will likely stay choppy during these months where higher rates have yet to materially cool consumer spending.”
The Fed follows the PCE measures more closely than it does some of the other inflation metrics because the index adjusts for consumer spending habits, such as substituting lower-priced goods for more expensive ones. That provides a more accurate view of the cost of living.
Policymakers tend to focus more on core inflation as they believe it provides a better long-run view of inflation, though the Fed officially tracks headline PCE.
Much of January’s inflation surge came from a 2% rise in energy prices, according to Friday’s report. Food prices increased 0.4%. Goods and services both rose 0.6%.
On an annual basis, food prices rose 11.1%, while energy was up 9.6%.
Earlier Friday, Cleveland Fed President Loretta Mester noted in a CNBC interview that there has been some progress made but “the level of inflation is still too high.”
A nonvoting member of the rate-setting Federal Open Market Committee, Mester has been pushing for more aggressive increases. She said she’s not sure if she’ll again advocate for a half percentage point boost at the March FOMC meeting.
In the wake of Friday’s data, market pricing increased for the likelihood of a half-point, or 50 basis point, increase next month, to about 33%, according to CME Group data.

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Africa’s two largest economies have been put on warning by the global anti-money laundering watchdog over shortfalls in combating illicit finance and organised crime.The Paris-based Financial Action Task Force said on Friday that it was placing South Africa and Nigeria on its “grey-list” of countries that needed to do more to improve their ability to fight financial crime, exposing them to greater scrutiny by investors and banks around the world.FATF actions can strongly affect how the financial probity of countries is perceived. The G7-created body can ultimately “blacklist” banking systems over serious deficiencies in stopping money laundering and terrorist financing.South Africa is only the second G20 economy after Turkey to have been added to the FATF grey-list. The United Arab Emirates, Albania and Yemen are also among those grey-listed. Only three countries — Iran, North Korea and Myanmar — are blacklisted.The watchlist does not technically call for greater due diligence of countries named, but in practice banks and investors can often subject affected transactions to more scrutiny — costs that the troubled economies of South Africa and Nigeria can ill-afford.South African banks have already said they have strengthened controls to mitigate the effects of the grey-listing. “Importantly, the costs of increased monitoring will be substantially lower than the long-term costs of allowing South Africa’s economy to be contaminated by the flows of proceeds of crime and corruption,” the South African Treasury said on Friday.President Cyril Ramaphosa’s government raced last year to pass laws in order to plug gaps identified by the FATF, but it has struggled to show real progress in investigating and prosecuting organised crime and corruption scandals tied to the governing African National Congress.Nigeria’s grey-listing comes just a day before it holds presidential and parliamentary elections, and after cash shortages linked to measures to prevent vote-buying have been hitting economic activity.South Africa has made “significant progress” to meet recommendations to improve laws and develop better policies, the task force said. Nigeria “has made progress”, it added.South Africa’s central bank said on Friday in response to the grey-listing that it had a “zero-tolerance approach when addressing the abuse of the financial system by money launderers or terrorist financiers”.“South Africa’s hard work resulted in most of the identified deficiencies being addressed within the 12-month observation period afforded to South Africa,” the reserve bank added.The FATF also suspended Russian as a member on the first anniversary of the invasion in Ukraine, a significant sanction by an agency whose reach extends beyond western financial systems.Russia’s actions “unacceptably run counter to the FATF core principles aiming to promote security, safety, and the integrity of the global financial system”, such as signs of involvement in arms trading and cyber crimes over the war, the watchdog said.Serhiy Marchenko, Ukrainie’s finance minister, called in the Financial Times this month for western nations to expel Russia from the task force in order to “significantly increase the cost of doing business with Russia and effectively choke Putin’s ability to finance his illegal war of aggression”. More

The country’s IPCA-15 consumer price index rose 0.76% in the month to mid-February, up from 0.55% in the previous month, while economists polled by Reuters had forecast a 0.72% increase.Annual inflation reached 5.63%, down from 5.87% a month earlier but also above the 5.6% forecast by economists, with interest rate cuts still seen as unlikely in the very short term.The latest data follows a clash between President Luiz Inacio Lula da Silva and central bank governor Roberto Campos Neto over high interest rates, when speculation of a potential government move to boost inflation targets emerged.Lula’s criticism of the central bank led to a deterioration of inflation expectations and a steepening of the yield curve. Brazil has an inflation target of 3.25% this year and 3% in 2024 and 2025, in all cases with a 1.5-point tolerance band.Campos Neto defended the central bank’s autonomy to pursue targets by hiking rates, currently at a six-year high of 13.75%, while Lula has said lending costs were far too high given the inflation trajectory, hindering economic growth.Andres Abadia, Pantheon Macroeconomics’ chief Latin America economist, said that under “normal circumstances” the recent fall in annual inflation would trigger a dovish shift by the central bank, but that noise stemming from Lula’s remarks was still a threat.”Unfortunately, uncertainties about the government’s commitment to low inflation, including the autonomy of the central bank, have raised red flags,” Abadia said in a note to clients.Brazil’s top economic policy council earlier this month decided to put off the discussion by announcing no new resolutions regarding its inflation targets, but it may still review the targets at any time.Some of the country’s top hedge fund managers have recently dubbed the inflation goals “unrealistic” and “too ambitious” to be met, calling for an upward change.Under current targets, Friday’s inflation data will not ease policymakers’ concerns about the strength of core inflation, Capital Economics’ chief emerging markets economist William Jackson said.Prices in eight of the nine groups surveyed rose in February, with education posting the largest impact. Only apparel costs fell in the period.”We continue to think that Copom will only turn to monetary easing towards the end of the year, delivering 100bp of cuts (to 12.75%),” Jackson said – a view shared by private economists polled by the central bank. More