Inflation fell two-tenths of a percentage point to a 2.4% rate for the year ending in January, the Bureau of Economic Analysis reported Thursday in an update to the personal consumption expenditures index, the lowest such rate since February 2021, just after President Joe Biden took office.
The drop in headline inflation is welcome news for Biden and the Federal Reserve, which has been seeking additional evidence that its campaign to lower inflation by raising interest rates is working. The Fed’s target is 2% inflation in the PCE index.
Some of the report’s details, though, were less favorable.
Most notably, core inflation, which strips out the volatile categories of food and inflation, fell only a tenth of a percentage point to 2.8% for the year. Core inflation was 0.4% just in the month of January, the fastest such rate in a year and well above the pace consistent with the Fed’s target.
“No matter what gauge used, inflation is still stuck above the Federal Reserve’s 2% target,” House Ways and Means Committee Chairman Jason Smith (R-MO) said in a statement. “High interest rates to combat Bidenflation are driving up home and auto prices for families and the cost of doing business for Main Street.”
The report for January is of particular interest because officials have received conflicting information in recent months on the trajectory of inflation.
On the one hand, inflation has fallen dramatically since 2022, when supply-chain disruptions from the reopening from the pandemic and the Russian invasion of Ukraine, combined with major government spending, created massive upward price pressures.
On the other hand, other inflation indices showed prices rising in January faster than expected. The consumer price index registered core inflation rising 0.4% just in the month, equivalent to an annual rate of about 5%.
One major development complicating the analysis for Fed officials is that costs related to energy and durable goods have been falling as supply chain problems have eased. At the same time, prices for services have been rising quickly — a worrying sign for Fed officials, as it suggests labor markets are still tight and that wage gains are pressing up on prices. Friday’s report showed prices for services rising 0.6% in January, the second fastest such monthly pace in decades, after June 2022.
The signs of obstinate inflation in January led some Fed officials to say they would need more time before declaring victory.
“I am going to need to see at least another couple more months of inflation data before I can judge whether January was a speed bump or a pothole,” Fed governor Christopher Waller said in a speech last week. “I will be watching wages and compensation … to see whether broad progress on inflation continues or stalls.”
To combat inflation, the Fed raised its target interest rate from zero at the start of 2022 to a range of 5.25%-5.50%. Rates on a range of financial instruments, from mortgages to Treasury securities, rose in tandem.
The higher rates have curtailed homebuying, but they have not yet slowed consumer spending or broader economic growth.
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In fact, economic growth exceeded expectations for 2023, clocking in at 2.5% for the year. Economists expect growth to persist through 2024.
Although the robust GDP and job growth have boosted Biden, the bout of higher inflation has taken a steep toll on his popularity. Voters disapprove of his handling of the economy.
