Inflation Accelerated in January, Although Consumer Sentiment Climbed This Month

The Fed’s preferred gauge of inflation accelerated last month, suggesting inflation is becoming more entrenched in the economy and signaling more interest rate hikes, although consumer sentiment rose in February to the highest in more than a year.

The Personal Consumption Expenditures (PCE) Price Index rose 0.6% from the previous month, accelerating from 0.2% in December, the Bureau of Economic Analysis (BEA) said Friday. Year-over-year, prices were up 5.4%, compared with 5.3% in December.

The core index, which excludes volatile food and energy prices, also rose 0.6%, from 0.4% in December. Prices were up 4.7% on an annual basis, compared with 4.6% in December and exceeding forecasts of 4.3%.

Consumer Sentiment Improves

Still, the University of Michigan’s Consumer Sentiment Index (MCSI) rose to a 13-month high of 66.4 in February from 64.9 in January.

Sentiment plunged to records last year as the price of gasoline and other necessities surged amid the highest inflation in four decades. The index fell to a record low of 50 in June, surpassing previous all-time lows set during the Great Recession in 2008 and the stagflationary era of the 1970s and early 1980s. Sentiment rebounded in the second half of last year as inflation began to ease, although it remains well above the Fed’s target rate of 2%.

Implications for Monetary Policy

The inflation reading could prompt Fed officials to consider a more aggressive monetary policy stance in the weeks ahead. Traders are now anticipating three additional rate hikes of 25 basis points each at the upcoming FOMC meetings in March, May, and June, culminating in a terminal fed funds rate between 5.25% and 5.5%, according to fed funds futures published by CME Group.