Instant View: January PCE inflation no surprise, cools year on year

(Reuters) - The U.S. Commerce Department's Personal Consumption Expenditures (PCE) price index increased 0.3% in January after advancing by an unrevised 0.3% in December, data showed on Friday. Economists had expected the PCE price index to climb 0.3%. In the year through January, prices rose 2.5% after increasing 2.6% in December.

Stripping out the volatile food and energy components, the PCE price index gained 0.3% last month after an unrevised 0.2% rise in December. Year on year, core inflation increased 2.6% after climbing 2.9% in December.

The Fed tracks the PCE price measures for its 2% inflation target. Financial markets expect the Fed will resume cutting interest rates in June.

MARKET REACTION:

STOCKS: S&P 500 emini futures added to modest gains and were up 0.27%, pointing to a firm open on Wall Street

BONDS: U.S. Treasury 10-year yield was little moved at 4.256% and the two-year yield ticked up to 4.053%

FOREX: The dollar index was off 0.08%, little moved. The euro was up 0.1%

COMMENTS:

JEFFREY ROACH, CHIEF ECONOMIST, LPL FINANCIAL, CHARLOTTE, NORTH CAROLINA (by email)

"Softer consumer spending and slower income growth should catch the Fed’s attention. Despite the deceleration in the annual pace of inflation, the monthly rate is still running hotter than the Fed would like. Investors will continue to focus on the uncertain growth trajectory as real spending unexpectedly fell in January from weaker consumer demand. The odds are rising that the Fed’s next rate cut will be in June. Whether the next cut happens then or in July is less relevant than the number of cuts by end of year. The current macro backdrop suggests only two cuts in total this year but more in 2026."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN

"Income growth was helped by the usual Social Security cost of living adjustment and dividend growth. Spending was hit hard by the nasty weather in January. Inflation was in-line with expectations. The problem isn’t about what inflation was so much as what people fear it might be. There’s often a divide between how people say they feel and how they actually spend their money. The looming threat of tariffs could lead people to accelerate purchases to try to front-run possible price hikes. The February data that comes out in March could show a big rebound in spending. The data will give lots of head-fakes for a while."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

“The inflation numbers still remain elevated, although they came in within expectations, but on a year-to-year basis there was a slight relief from the previous reading, but the report indicates that inflation remains sticky.”

“That means the pause will continue. And that means that the Fed may have a dilemma on its hands because the recent macro numbers are cooling and it shows signs of the economy cooling.”

“Now the personal income that was stronger than we expected by nearly 6/10 of a percent, so income is still strong and that means that you know such the consumer still has buying power most consumers, anyway.”

“Spending came in lower than we were looking for, and some of this may have been weather-related, but most of it I would attribute to a cooling economy, which presents a dilemma for the Fed in the sense that you still have inflation and you have an economy that is moving lower. If you add them together, that equals stagflation.”

(Compiled by the Global Finance & Markets Breaking News team)