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US inflation at 2.4% in January raises expectations for Fed rate cuts

US inflation fell to 2.4% in the year to January, according to the measure most closely watched by the Federal Reserve. While on the surface, that reading bolstered expectations of rate cuts by the Fed this year, the actual performance in January was like the broader Consumer Price Index in the same month: a little too sticky for comfort.

Month-on-month, the Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, rose 0.3% in January, or 0.4% when food and energy are excluded. This core inflation reading was the highest in a year on a month-to-month basis, confirming that the recent easing trend for costs slowed in January.

On an annual basis, the core reading at 2.8% was the lowest since February 2021 (as was the headline figure of 2.4%).

On the income side of the data, there was no change: overall personal income rose 1% in January—a big move driven by the Social Security cost-of-living adjustment and higher dividends on stock portfolios. However, disposable personal income—income after taxes—rose a more modest 0.3%, and after inflation, income didn’t rise at all; it was flat, compared to a 0.2% gain in December.

This stagnant income may worry retailers, especially as they start looking out into the US spring and summer seasons, wondering if the solid performance over fall and winter will continue if consumer incomes are under pressure.

The very mixed data had little impact on shares on Thursday because the outcome had been in many forecasts after the mixed Consumer Price and Producer Price Index readings earlier. However, that didn’t stop Wall Street from another positive month of gains—up around between 2% to 5%.

Meanwhile, US initial benefits claims rose 13,000 last week to a still very low 215,000. In total, 1.9 million Americans were collecting jobless benefits during the week that ended February 17, up 45,000 from the previous week and the most since November. Weekly unemployment claims are broadly viewed as representative of the number of US layoffs in a given week. They have remained at historically low levels since the pandemic purge of millions of jobs in the spring of 2020. The four-week average of claims, a less volatile measure, fell by 3,000 to 212,500 from the previous week.

The February employment report will be issued a week today (Friday).