Key U.S. inflation rose at fastest pace since June

WASHINGTON. The Federal Reserve’s preferred inflation gauge rose last month at its fastest pace since June, a worrying sign that price pressures remain in the US economy and could see the Fed continue raising interest rates this year.

Friday’s Commerce Department report showed that consumer prices rose 0.6% from December to January, compared with a 0.2% rise from November to December. On an annualized basis, prices rose 5.4% compared to 5.3% year on year in December.

Excluding volatile food and energy prices, so-called core inflation rose 0.6% since December, compared with a 0.4% rise in the previous month. And compared to a year earlier, core inflation rose 4.7% in January, compared with a 4.6% year-on-year increase in December.

The report also showed that consumer spending rose 1.8% last month compared to December after falling the previous month.

January price data beat forecasters’ expectations, dispelling hopes of a steady slowdown in inflation and that the Fed might ease its rate hike campaign. This follows other recent data that also suggests the economy is still gripped by inflation despite the Fed’s strenuous efforts to contain it.

Last week, the government released a separate measure of inflation, the Consumer Price Index, which showed prices rose 0.5% from December to January, much more than the 0.1% rise the previous month. On an annualized basis, consumer prices rose 6.4% in January. This was well below the recent peak of 9.1% in June, but still well above the Fed’s inflation target of 2%.

Since March last year, the Fed has attacked inflation by raising the key interest rate eight times. However, despite the higher cost of borrowing for individuals and businesses, the labor market remains remarkably resilient. This is actually a worrying sign for the Fed because high demand for workers tends to drive up wages and general inflation. In January, employers added a staggering 517,000 jobs and the unemployment rate fell to 3.4%, the lowest level since 1969.

“Increasing price pressures, combined with a still strong labor market that is rebounding earnings and supporting demand, will force the Fed to keep raising rates in upcoming meetings,” said Rubila Farooqi, chief US economist at High Frequency Economics.

The Fed is believed to be watching Friday’s inflation indicator – the Personal Consumption Expenditure Price Index – even more closely than the more well-known government consumer price index.

As a rule, the PCE index shows a lower inflation rate than the CPI. This is partly because rents, which have risen sharply, carry twice as much weight in the CPI as they do in the PCE.

The PCE price index also attempts to account for changes in how people shop when inflation spikes. As a result, it can pick up on new trends—when, for example, consumers are ditching expensive national brands in favor of less expensive brands.

The consumer price index showed an alarming increase from December to January: it jumped by 0.5% – five times more than from November to December.

Similarly, the government’s measure of wholesale inflation, which measures prices rising before they hit consumers, rose 0.7% from December to January after falling 0.2% from November to December.