U.S. Inflation Data Meets Forecasts as Economy Shows Mixed Signals, Markets Rise

Federal inflation data released Friday aligned with economist predictions while economic growth fell short of expectations. Stock markets responded positively to the mixed economic indicators, with analysts noting continued concerns about persistent price pressures.

Federal economic data released Friday showed consumer price increases matching analyst forecasts for January, providing another indication that inflation pressures remained relatively controlled before recent geopolitical tensions escalated.

The Commerce Department’s Personal Consumption Expenditures Price Index climbed 0.3% compared to December, matching economist predictions and down from the previous month’s 0.4% increase. When excluding volatile food and energy costs, the core measure advanced 0.4% monthly, also meeting expectations.

Over the full 12-month period ending in January, consumer price inflation reached 2.8%, slightly below the anticipated 2.9% increase. The core inflation measure hit 3.1% annually, matching forecasts and up from December’s revised 3% rate. Federal Reserve officials use these price indicators to guide policy toward their 2% inflation goal.

Separately, the Commerce Department’s updated estimate revealed gross domestic product expanded just 0.7% during the fourth quarter, falling well short of the 1.4% growth economists had projected.

MARKET RESPONSE:

Wall Street stocks climbed following the data release, with the Dow Jones Industrial Average gaining 0.6%, the S&P 500 advancing 0.8%, and the Nasdaq Composite rising 0.9%.

Government bond yields declined, with the benchmark 10-year Treasury note dropping 3 basis points to 4.24%. The two-year yield, closely tied to Federal Reserve policy expectations, fell 6 basis points to 3.70%.

The dollar index strengthened 0.2% to reach 99.95.

EXPERT ANALYSIS:

Gary Schlossberg, global strategist at Wells Fargo Investment Institute in San Francisco, noted: “The January report on personal income, spending and inflation showed inflation-adjusted consumer spending barely keeping pace with the rise in prices, partly due to harsh winter weather, despite solid growth in after-tax incomes.”

He continued: “The sluggish January pace of inflation-adjusted spending, slippage in the report’s headline inflation measure and news that the first-quarter GDP growth estimate was cut in half (to 0.7%) initially sent stock and bond prices higher on increased hopes for an early rate cut by the Federal Reserve.”

Schlossberg added: “Inflation as measured by the PCE deflator, the report’s price gauge favored by the Federal Reserve, slowed a notch, to 2.8%, but maintained its distance above more benign CPI inflation. Moreover, core inflation climbed to a March 2024 high in accelerating a second straight month, to 3.1%. Unexpectedly strong income growth, supported by cost-of-living adjustments at the start of the year, kept pace with a solid gain in consumer spending not adjusted for inflation in lifting the personal saving rate to a six-month high of 4.5%.”

James St. Aubin, chief investment officer at Ocean Park Asset Management in Santa Monica, California, observed: “The Fed’s preferred inflation measure is still running hot thanks to services. It certainly doesn’t help the dovish case, but the reality is it’s old news. The effects of skyrocketing energy prices are just starting. If you’re looking for a silver lining it’s that goods prices remain somewhat contained.”

Matt Bush, U.S. economist at Guggenheim Investments in New York, commented: “The big news is the core PCE inflation number coming in not quite as bad as feared. We’ve had relatively good news on the CPI inflation front in recent months, but core PCE inflation has been quite a bit hotter than the CPI data. And while that was still true with January’s numbers, the January core PCE wasn’t quite as bad as feared. And so I think that’s causing some reaction in rates markets and pricing for the path of Fed policy.”

Peter Cardillo, chief market economist at Spartan Capital Securities in New York, stated: “We have a mixed bag of macro news here. Of course, the downward revision of GDP was much more than expected and that’s not good news, along with the fact that consumer spending was revised downward. The good news is that the inflation data measured by the PCE basically in line with expectations. … Inflation remains elevated, sticky and with the possibility of energy prices eventually moving into the pipeline, the Fed is likely to stay on hold for a longer period of time.”

Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, noted: “Most of today’s economic numbers were generally in line with expectations with the exception of durable goods orders, which was weak and the GDP estimate which was also weak. There’s some concern about the economy from these numbers. These are numbers worth looking at and they question the strength of the U.S. economy. War issues in the Middle East are the most important determinant of financial markets at the moment.”