Inflation was down slightly for the Fed in January. However, we are still a long way from their 2% inflation target.
The central bank mandate is complicated by the sharp rise in income and the decline of consumer spending. This has thrown a wrench into the plans for anyone hoping to see a fourth quarter full of economic growth.
This is a summary of what the most recent personal consumption expenditures report means for markets, interest rates and economic growth.
In January the PCE Index rose by 2.5%, down from its previous 2.6%. Core PCE (which excludes volatile energy and food costs) saw a greater decline in January.
Bureau of Economic Analysis reported that personal incomes increased by 0.9% from month to month. Private wages and salaries were the main contributors, it said. Current transfer receipts for personal payments, which are made without any exchange of goods or services, have also increased dramatically. However, this is due to adjustments in Social Security payments at the start of each year.
In January, consumer spending fell by 0.2% compared to the prior month. Motor vehicles, home furnishings and recreation goods were the three biggest areas that experienced a decrease in spending.
These latest figures have significantly decreased expectations regarding Q1 GDP. Today, the Atlanta Fed’s GDPNow model has been revised to predict that the US economy is expected to contract by 1.5 percent during the first quarter of 2025. This would mark the first decline since Q1 2020.
The model predicted that the economy would expand at 2.3% per quarter during the first three months of the year.
The market initially rose on the slight decline in PCE headline, but quickly lost any gains when geopolitical concerns took centre stage. The world was not convinced by President Trump’s meeting on Friday with Ukrainian president Volodymyr Zelensky that the Russian-Ukrainian talks are progressing well.
Fed funds markets still expect central bankers at the next meeting to maintain interest rates on March 19. They have priced in 94% of that outcome.
Powell will have to explain his long-term perspective. On the one hand, it’s encouraging to see headline inflation dipping — even if only slightly — but we can’t imagine he’s too satisfied with the current labor market situation.
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