US consumer inflation picks up in January as spending slows

  • U.S. consumer prices increased in January.
  • A gauge of underlying inflation posted its largest gain in 12 months.
  • The data bolstered views that price pressures will accelerate this year.
A cashier handles money in Macy's Herald Square store in New York.
Andrew Kelly | Reuters
A cashier handles money in Macy's Herald Square store in New York.

U.S. consumer prices increased in January, with a gauge of underlying inflation posting its largest gain in 12 months, bolstering views that price pressures will accelerate this year.

The Commerce Department said on Thursday consumer prices as measured by the personal consumption expenditures (PCE) price index, rose 0.4 percent. That was the biggest increase since September and followed a 0.1 percent gain in December.

In the 12 months through January, the PCE price index rose 1.7 percent after a similar gain in December because of base effects. Excluding the volatile food and energy components, the PCE price index advanced 0.3 percent in January - the largest gain since January 2017.

The so-called core PCE price index rose 0.2 percent in December. Unfavorable base effects also kept the annual increase in the core PCE price index at 1.5 percent in January. The core PCE index is the Federal Reserve's preferred inflation measure.

Economists polled by Reuters had forecast the core PCE price index rising 0.3 percent in January and advancing 1.5 percent year-on-year. The core PCE price index has undershot the U.S. central bank's 2 percent target since mid-2012.

Inflation is expected to breach its target this year as a tightening labor market boosts wage growth. Faster economic growth, spurred by a $1.5 trillion tax cut package and increased government spending, is also seen stoking inflation.

Fed Chairman Jerome Powell on Tuesday offered an upbeat assessment of the economy, telling U.S. lawmakers "my personal outlook for the economy has strengthened since December." Powell also acknowledged that "fiscal policy is becoming more stimulative."

Those remarks prompted traders to raise their bets on four rate increases this year. The Fed has forecast three rate hikes in 2018, but economists expect that will be revised up when the central bank publishes its projections at the end of the March 20-21 policy meeting.

Higher inflation cut into consumer spending growth in January. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, gained 0.2 percent. That was the smallest increase since August and followed a 0.4 percent advance in December.

When adjusted for inflation, consumer spending fell 0.1 percent, declining for the first time since January 2017. The so-called real consumer spending rose 0.2 percent in December. The drop in real consumer spending in January suggests consumption will slow from the fourth-quarter's robust 3.8 percent annualized pace.

It was also the latest indication that economic growth moderated at the start of the year after a 2.5 percent rate of expansion in the fourth quarter. Industrial production, home sales and core capital goods orders fell in January.

But spending remains underpinned by a strong labor market, which Fed officials consider to be near or a little beyond full employment. Personal income rose 0.4 percent in January after increasing by the same margin in December. Wages increased 0.5 percent in January after rising 0.4 percent the prior month.

Savings increased to $464.4 billion in January from $363.2 billion in the prior month. The saving rate jumped to 3.2 percent from 2.5 percent in December. Savings in January were boosted by tax cuts, the Commerce Department said.

Get the market reaction here.

This is breaking news. Please check back for updates.