Metric analysis

Inflation hits 40-year high according to Fed metric

Inflation hit its highest level in four decades in January in the Federal Reserve’s preferred gauge, increasing pressure on the central bank to act quickly to rein in rising prices.

Prices rose 6.1% in the year ending January, according to the personal consumption expenditure price index updated Friday by the Bureau of Economic Analysis. Inflation is up three tenths of a percentage point from the previous month and at a rate not seen since the end of the Great Inflation era in early 1982.

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The Fed’s inflation target, by comparison, is 2%, measured by the same index. The major inflation overshoot has forced Fed Chairman Jerome Powell to scramble to tighten monetary policy and led to accusations that the central bank is behind the curve. High prices have also led voters to be wary of President Joe Biden’s handling of the economy and hurt support for his proposals for new federal spending.

Price increases in January were largely due to a significant rise in the cost of energy – more than a quarter over the year, a phenomenon that has particularly hurt drivers who pay more for petrol . Food prices also increased by almost 7% during the year.

So-called core inflation, which excludes the relatively volatile categories of energy and food prices, rose three tenths of a percentage point to 5.2% in January, the highest since 1983, showing underlying inflationary pressures were strong.

The PCE index differs from the consumer price index, which showed inflation of 7.5% in January.

The PCE index is reported in the bureau’s Personal Income and Expenditure report, which showed strong consumer spending in January.

“Spending continues apace even as consumers grapple with continued price hikes,” noted Rubeela Farooqi, chief U.S. economist for High Frequency Economics.

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Soaring inflation has led investors to expect the Fed to raise its interest rate target, set at zero during the pandemic, in an effort to prevent a larger collapse in spending, soon in the coming months. Bond market prices on Friday morning indicated that investors expect the central bank to raise the target from zero to at least a quarter of a percentage point in March, then implement several more rate hikes while throughout the year.