PCE Deflator

The Personal Consumption Expenditures (PCE) deflator, the Federal Reserve’s preferred inflation gauge, climbed 0.3% in January, maintaining the same pace as December. Energy prices continued their upward trend, rising 1.3% in January after a 2.4% increase the previous month, while food costs edged up 0.3%. Excluding the more volatile food and energy components, core PCE also advanced 0.3% in January, marking its fastest increase since October.

On a year-over-year basis, the PCE deflator rose 2.5% over the past 12 months, easing slightly from 2.6% in December. Core inflation also cooled, dropping from 2.9% in December to 2.6% in January—the slowest pace in seven months. While inflation has retreated significantly from its recent peaks—7.1% in June 2022 for the PCE deflator and 5.5% in September 2022 for core PCE—core inflation remains above the Federal Reserve’s 2% target, with persistent price pressures in key sectors. Notably, core inflation has averaged 2.7% year-over-year over the past nine months, indicating a period of stalled progress in disinflation.

The Federal Reserve is expected to maintain a cautious stance, closely monitoring inflation trends before making further policy adjustments. The Federal Open Market Committee (FOMC) left short-term interest rates unchanged at its latest meeting, signaling a wait-and-see approach as it assesses upcoming data. With inflation proving stickier than policymakers would like, interest rates are expected to remain elevated, even as the potential for cuts later this year remains on the table.

Personal consumption expenditures dipped 0.2% in January, marking the first decline since March 2023 after four consecutive months of solid gains. Adverse weather conditions likely weighed on spending in certain regions. However, consumer demand for dining and travel remained resilient, with spending on food services and accommodations surging 0.9% in January after a relatively flat December. Over the past year, overall personal spending has climbed 5.6%, while food services and accommodations posted a 4.8% year-over-year gain. These figures underscore the critical role of consumer spending in sustaining the U.S. economy, helping to counterbalance broader economic uncertainties.

However, a portion of this growth stems from higher prices rather than increased consumption. Inflation-adjusted personal consumption expenditures, measured in chained 2017 dollars, have risen 3.0% over the past year, though real spending declined 0.5% in January. In contrast, real spending on food services and accommodations climbed 0.5% for the month, reflecting a 1.8% year-over-year increase.