Getting inflation under control since the worst surge in decades has been a bumpy process in recent months. New data on Friday showed a little progress, but also an unexpected pullback in consumer spending, complicating the path forward for the Federal Reserve as it debates when to restart interest rate cuts.
The central bank’s preferred inflation measure, released on Friday, climbed 2.5 percent in January from a year earlier, slightly lower than the previous reading of 2.6 percent but still well above the central bank’s 2 percent target. On a monthly basis, prices increased 0.3 percent, in line with December’s pace.
The “core” personal consumption expenditures price index, which strips out volatile food and energy costs and is closely watched as a gauge for underlying inflation, rose another 0.3 percent in January. Compared to the same time last year, it is up 2.6 percent, data from the Commerce Department showed. In December, it rose at an annual pace of 2.8 percent.
The inflation figures were in line with what economists had expected and underscored the Fed’s decision to proceed cautiously with interest rate cuts after making adjustments in the second half of last year. The interest rate set by the Fed stands at 4.25 percent to 4.5 percent.
Spending fell 0.2 percent in January, led by a drop in spending on cars and other goods. Economists had expected a 0.2 percent increase overall, following a 0.8 percent increase in December. Once adjusted for inflation, spending dropped by 0.5 percentage points, which is the sharpest monthly drop in almost four years.
Thomas Ryan, an economist at Capital Economics, attributed the decline in part to “unseasonably severe winter weather,” but warned that the Fed’s job will become “trickier if January’s sharp decline in consumption was a sign of consumer strength buckling.”
Economists at Wells Fargo said Friday’s data offered “a look at what consumer life might look like in a world where goods spending is put on ice.”
Still, personal income rose 0.9 percent, a sharp acceleration from the previous month and reflecting a cost-of-living adjustment to Social Security benefits.
To restart rate cuts, officials at the central bank said they need to see convincing evidence that inflation is indeed in retreat and headed back to 2 percent. Speaking at an event on Thursday, Beth Hammack, president of Federal Reserve Bank of Cleveland, said it was “far from a certainty” that inflation would gradually decline soon and that “upside risks to the inflation outlook abound.” For that reason, she backed the Fed being on hold “for some time.”
But policymakers could pull forward their timing for a cut or pencil in a much steeper reduction in borrowing costs if the labor market unexpectedly weakens.
“The level of uncertainty is very high,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “If it doesn’t subside, you have to get worried about if we are downshifting in growth.”
Concerns about the economy have taken center stage in recent days as a number of sentiment surveys showed consumers souring on the outlook for growth as well as for inflation. The shift comes as households and businesses brace for policy changes coming from the White House.
President Trump doubled down on his plans to slap tariffs on two of the country’s biggest trading partners, Canada and Mexico. He has also threatened steeper levies on China as well as a raft of measures to protect steel and aluminum imports, among other industries. These plans come alongside proposals to deport migrants, lower taxes, cut government spending and reduce regulation.
Fed officials are focused on what they have referred to as the net effect of Mr. Trump’s policies and have largely opted against commenting directly about how they may alter their plans for interest rates.