The Federal Reserve’s preferred inflation gauge accelerated more than expected in January, triggering a sell-off in US stocks and Treasuries as investors weighed the prospect of interest rates staying higher for longer as the central bank combats stubborn price pressures.
The personal consumption expenditures (PCE) price index, which measures how much consumers are paying for goods and services, increased 0.6 per cent month-on-month, after rising 0.2 per cent in December. The annual rate increased to 5.4 per cent in January from an upwardly revised figure of 5.3 per cent a month earlier.
The so-called core PCE index, which strips out volatile food and energy costs and is the Federal Reserve’s preferred inflation metric, rose 0.6 per cent in January, up from 0.4 per cent in December. The annual rate increased to 4.7 per cent from an upwardly revised figure of 4.6 per cent in December, missing economists’ expectations for a moderation of 4.3 per cent.
The figures released on Friday by the Bureau of Economic Analysis echo a recent run of data, including inflation, jobs growth and retail sales, that have come in hotter than expected and prompted traders to forecast US interest rates may have to stay higher for longer to cool the economy.
Fed chair Jay Powell warned earlier this month that rates might have to be raised higher than investors expected because the strong labour market meant it could take longer for inflation to return to the central bank’s 2 per cent target. His comments came just days after a blockbuster non-farm payrolls report showed the US economy added more than half a million jobs in January.
“[The data] underscores the difficulty the Federal Reserve has in restoring price stability, as consumers continue to spend at a healthy pace,” said Quincy Krosby, chief global strategist at broker LPL Financial.
US stock markets tumbled, leaving the S&P 500 down 1.5 per cent in early New York trading on Friday. The Nasdaq Composite was down 1.9 per cent.
Bonds fell and yields moved higher as investors factored in the greater likelihood of further interest rate rises. Yields on benchmark 10-year notes rose 0.05 percentage points to 3.93 per cent, close to a three-month high hit earlier this week. Rate-sensitive two-year yields also rose and, at 4.79 per cent, were at their highest since the summer of 2007.
Friday’s PCE data is consistent with the January consumer price index that registered a smaller monthly decline than expected, as services inflation remained elevated.
Personal consumption edged up in January to 1.8 per cent from a revised decrease of 0.1 per cent in December, according to BEA data on Friday. That missed economists’ expectations for an increase of 1.3 per cent. Inflation-adjusted personal spending increased 1.1 per cent in January.
“It is far too early . . . to buy the dips in bond prices, let alone trying to continue to buy the dips in the stock market,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “We have been exercising much more caution and have advised our clients to be careful and not aggressive at this point in the economic cycle.”
The PCE data showed personal income growth quickened to 0.6 per cent in January from 0.3 per cent in December, but below economists’ expectations for a 1 per cent increase. The personal savings rate increased to 4.7 per cent in January from 4.5 per cent in the previous month.