The US Federal Reserve's preferred inflation metric slowed last month, as officials suggest they are content to keep interest rates steady amid policy uncertainty.
The Personal Consumption Expenditures (PCE) Price Index rose 0.3 per cent in January, data from the Commerce Department showed on Friday. Prices rose 2.5 per cent on an annual basis, slightly lower than the 2.6 per cent rate the previous month.
Core PCE, which excludes food and energy, rose 0.3 per cent on a monthly basis and 2.6 per cent year-on-year, down from 2.8 per cent in December. All figures were in line with the FactSet consensus estimate.
Fed officials prefer to monitor PCE inflation as opposed to the Consumer Price Index (CPI) because it reflects changes in consumer spending, which CPI inflation does not.
The stock market is on track for its biggest monthly decline since April 2024. Market jitters have largely been triggered by tariff concerns, as US President Donald Trump this week confirmed levies on Canada and Mexico will begin on Tuesday. He also said Chinese goods will face an additional 10 per cent tariff that same day.
“Tariffs are the most obvious threat to the pricing environment and the last few tenths to the Fed's 2 per cent target remain in the crosshair,” Wells Fargo economists Tim Quinlan and Shannon Grein wrote to clients.
Meanwhile, an 8.5 per cent drop in Nvidia shares on Thursday following its earnings report also dragged down Wall Street's major indices.
Fed officials guarded against inflation
Friday's report was not expected to have a major impact on the Fed's next interest rate decision, slated for March 19.
“I believe that monetary policy has the luxury of being patient as we assess the path forward, and this will likely mean holding the federal funds rate steady for some time,” Cleveland Fed President Beth Hammack, a voting member on the central bank's rate-setting committee this year, said on Thursday.
Ms Hammack and other Fed officials have argued that they are in a good position to keep rates steady while inflation remains above their 2 per cent target. The Fed left rates unchanged at roughly 4.33 per cent when it met last month.
The latest inflation report also follows a stronger-than-expected CPI reading for March, with headline inflation above estimates at 3 per cent annually.
“Now is not the time to let down our guard,” Kansas City Fed President Jeffrey Schmid, another voting member this year, said on Thursday.
Further complicating the outlook are Mr Trump's policies. Economists have generally argued that his plans to implement tariffs, deport immigrants and offer a lighter regulatory touch for businesses could rekindle inflation.
He also asked the Commerce Department earlier this week to investigate whether copper imports pose a threat to US national security. That move follows his plans to impose a 25 per cent tariff on all steel and aluminium imports.
Minutes from the Fed's January meeting showed that officials were concerned such policies carry risks to the upside (higher inflation) and the downside (a weaker labour market).
“A couple of participants remarked that, in the period ahead, it might be especially difficult to distinguish between relatively persistent changes in inflation and more temporary changes that might be associated with the introduction of new government policies,” the minutes read.
Traders will get a clearer picture on the Fed's thinking with a slate of officials due to speak next week, including New York Fed Chair John Williams on Tuesday and Fed Chair Jerome Powell on March 7.