Is Inflation Finally Cooling Again? The Fed’s Favorite Gauge Says So | Global News Avenue

Inflation cooled in January, according to the Fed’s preferred measure for inflation, which contradicted the signal from an earlier official report this month.

The Bureau of Economic Analysis said Friday that the cost of living has risen by 2.5% over the past 12 months, measured by personal consumption spending. This is less than the December annual growth of 2.6%, which is the first decline in inflation volume in four months. The report marks a rare example of two major inflation measures by the government showing the opposite trend in the same month: Consumer price index rises unexpectedly In January, the Bureau of Labor Statistics said earlier this month.

The slowing PCE inflation provides some evidence that inflation is on the trajectory until the Fed is a 2% annualized rate, tending to hover before the pandemic. Inflation has been on a downward path since the post-pandemic pandemic, but progress has been stagnant for several months.

Friday’s reading of benign inflation matches economists’ expectations and could alleviate consumer and investor concerns about the possibility of an accelerated inflation that would keep the Fed from lowering interest rates.

The “core” of volatile prices excluding food and energy PCE inflation fell to 2.6% from 2.6% in the year, down from 2.9% in December, the lowest since June. Economists and policy makers prefer core measures when assessing inflation because reasons for food and gas prices have nothing to do with long-term inflation trends.

The government’s two major inflation measures, Consumer Price Index and Personal consumption expenditurecalculate different prices in different ways and consider different prices. For example, CPI is more affected by changes in housing costs. These two measures are usually moved roughly in series, but sometimes diverge. The Fed prefers PCE measures and uses core PCE inflation as a benchmark to assess whether inflation runs at a 2% target. Some economists speculate that January’s CPI inflation rate is surprising Partly due to the quirks of data.

Trump’s tariff plan is a wildcard to inflation

Many forecasters expect inflation Gradually decrease over the rest of the yearproviding some relief to household budgets, which have been squeezed by years of price increases in daily spending. But President Donald Trump’s proposed tariffs on foreign trading partners will begin next week It’s the main wildcardand can push prices to a wide variety of items.

The low price of year-on-year inflation in January may not be enough, and it itself is not enough to recover hope that the Fed will lower interest rates soon. The Fed kept its benchmark interest rate at a relatively high level in January to maintain upward pressure on borrowing costs for various loans to stop borrowing, slow the economy and delay inflation. Federal Open Market Committee members are central bank policy-making bodies that show that they are Don’t rush to reduce the fee rate Until they see more evidence that high inflation is indeed disappearing and can assess that Trump’s trade war will change the outlook.

“It is unlikely that the Federal Open Market Committee will lower the tax rate again until PCE inflation drops significantly,” said Gus Faucher, chief economist at PNC in comments. “The PNC expects the next Fed’s funding reduction rate to be lowered in May. However, if tariffs and stronger wage growth lead to higher inflation in the near term, this reduction can be reduced to 2025, or even 2026.”

Updated, February 28, 2025: After publication, this article has been updated to include comments from economists and to discuss the possible impact of the report on the Fed’s monetary policy.

Calibration, February 28, 2025: After publication, this article has been updated to correct the core PCE inflation rate in December, including the BEA revision of the December data.