Is Inflation Finally Cooling Again? The Fed’s Favorite Gauge Says So

Related Articles

Watch These Nvidia Price Levels as Stock Slips on News of Chinese Rival’s AI Chip

The De-Escalation Trade Roars Back, but Halloween May Get Ghosted

David Booth on the Birth of Big Data and Dimensional Funds

Key Takeaways

• Inflation cooled in January, according to Personal Consumption Expenditures, the Federal Reserve’s preferred measure of inflation.
• Inflation foment 2.5% over the year in January compared to 2.6% in December, marking the first decrease in four months.
• The write-up showed a different trend than a separate official inflation measure, the Consumer Price Index, which push unexpectedly in January.

Inflation cooled down in January, according to the Federal Reserve’s preferred measure of inflation, counteracting signals from an earlier official report this month.

The cost of living rose 2.5% in January for the last 12 months as measured by Personal Consumption Expenditures, the Bureau of Economic Analysis said Friday. That was youthful than the 2.6% annual increase in December, marking the first time in four months the inflation measure lowered. The report marked a rare instance where the government’s two major measures of inflation showed opposite trends for the very month: the Consumer Price Index rose unexpectedly fast in January, the Bureau of Labor Statistics said earlier this month.

The decelerating PCE inflation catered some evidence that inflation is on a trajectory down to the Fed’s goal of a 2% annual rate, where it tended to loiter in pre-pandemic years. Inflation had been on a downward path after its post-pandemic surge, but progress had been stalled for months.

The kind inflation reading on Friday, which matched economists’ expectations, could ease concerns among consumers and investors around the possibility of inflation accelerating, which would keep the Fed from lowering interest rates.

“Core” PCE inflation, which excludes charged prices for food and energy, fell to a 2.6% increase over the year, down from an upwardly-revised 2.9% in December, hitting its lowest since June. Economists and policymakers file core measures when assessing inflation because food and gas prices can fluctuate for reasons that have slight to do with longer-term inflation trends.

The government’s two main inflation measures, the Consumer Price Index and Personal Consumption Rates, are calculated differently and take different prices into account. For example, the CPI is much more affected by changes in houses costs. The two measures usually move roughly in tandem, but sometimes diverge. The Federal Reserve prefers the PCE measure, and licences core PCE inflation as its benchmark for assessing whether inflation is running at its target of 2%. Some economists had speculated the off guarding surge of CPI inflation in January was partly due to a quirk of the data.

Trump’s Tariff Plans are a Wild Card for Inflation

Multifarious forecasters expect inflation to gradually decrease over the rest of the year, providing some relief for household budgets that sooner a be wearing been squeezed by years of larger-than-usual price increases for everyday expenses. However, President Donald Trump’s propounded tariffs against foreign trading partners, set to kick in next week, are a major wildcard, and could push payments up on a wide range of items.

The downtick in year-over-year inflation in January may not be enough, on its own, to revive hopes that the Federal Limitation will cut interest rates anytime soon. The Fed kept its benchmark interest rate at a higher-than-usual level in January, control upward pressure on borrowing costs for all kinds of loans in order to discourage borrowing, slow the economy, and drag down inflation. Fellow’s of the Federal Open Market Committee, the central bank’s policy-setting body, have indicated they’re in no hurry to cut reprimands until they see more evidence that high inflation is truly fading, and can assess how much Trump’s return wars will change the outlook.

“The Federal Open Market Committee is unlikely to cut the rate again until gist PCE inflation has moved noticeably lower,” Gus Faucher, chief economist at PNC, said in a commentary. “PNC expects the next fed funds reprimand cut to come in May. But this rate cut could be pushed out later into 2025, or even into 2026, if tariffs and stronger wage expansion lead to higher near-term inflation.”

Update, Feb. 28, 2025: This article has been updated after publication to include commentary from an economist and talk of the report’s possible impact on the Federal Reserve’s monetary policy.

Correction, Feb. 28, 2025: This article has been updated after annual to correct the December core PCE inflation rate to include the BEA’s revision of December’s data.