While disinflation is still underway, the latest data confirmed fears that without a larger slowdown in wage growth, inflation could be slow to return to the Federal Reserve’s 2 percent inflation target.
“While disinflation is still underway, the latest data confirmed fears that without a larger slowdown in wage growth, inflation will be slow to return to the Federal Reserve’s 2 percent inflation target,” said Orphe Divounguy, Zillow senior economist.
Personal consumption expenditures (adjusted for inflation) rose 1.1% in January after declining 0.3% in December. While personal outlays increased, savings also increased and the savings rate edged up to 4.7%.
The increase in consumer spending was supported by an increase in real disposable personal income in January, reflecting a downward adjustment to personal taxes and higher employee compensation which highlights the importance that wage growth could play in the Federal Reserve’s battle to bring down inflation. The 8.7% cost-of-living adjustment for Social Security also contributed to the increase in personal income that fueled spending.
The increase in consumer demand added to price pressures on the inflation front. The PCE price index is a measure of the prices that people living in the United States pay for goods and services. The PCE Price Index rose 0.6 percent in January after increasing 0.2% in December. Prices were 5.4% higher when compared to a year ago, an uptick from the 5.3% annual price increase recorded in December. Core PCE inflation – the Federal Reserve’s preferred inflation gauge – also rose to 4.7% year-over-year compared to 4.6% in December.
The higher than expected price increases are likely to push longer term yields – including mortgage rates – higher. But data supporting a cooling of the labor market as well as improvements on the inflation front will likely bring mortgage rates back down in the coming months.
