Breaking: US annual Core PCE inflation increases to 4.7% in January vs. 4.3% forecast

Inflation in the US, as measured by the Personal Consumption Expenditures (PCE) Price Index, rose to 5.4% on a yearly basis in January from 5.3% in December, the US Bureau of Economic Analysis reported on Friday. This reading came in higher than the market expectation of 4.9%.

The annual Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, edged higher to 4.7% from 4.6% in the same period, compared to analysts' forecast of 4.3%. On a monthly basis, Core PCE inflation and PCE inflation both rose 0.6%.

Further details of the publication revealed that Personal Income rose by 0.6% on a monthly basis in January and Personal Spending increased by 1.8%.

Market reaction

With the initial market reaction, the US Dollar Index pushed higher and was last seen rising 0.45% on the day at 105.05.

Hot PCE inflation data also provided a boost to the US Treasury bond yields while weighing heavily on US stock markets. At the time of press, the benchmark 10-year US T-bond yield was up 1.5% on the day at 3.94 and US stock index futures were down between 0.9% and 1.4%.

Commenting on the data, "risk markets are taking a beating amid a firmer PCE print and strong consumer spending," said TD Securities analysts. "With market pricing for Fed hikes set to move even higher, the odds of a hard landing are also increasing. This spells bad news for both precious metals and base metals moving forward."

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• Core Personal Consumption Expenditures Price Index is expected to rise by 0.4% MoM in January.
• Markets have largely priced in two more Federal Reserve 25 basis points rate hikes.
• US Dollar is likely to face renewed selling pressure if PCE figures match expectations.

The Core Personal Consumption Expenditures (PCE) Price Index data from the United States, the Federal Reserve’s (Fed) preferred inflation measure, will be published by the Bureau of Economic Analysis (BEA) on Friday, February 24 at 13:30 GMT.

What to expect of the Federal Reserve in the next PCE inflation report?

The Personal Consumption Expenditures Price Index, excluding food and energy, is set to have increased by 0.4% on a monthly basis in January, a bit higher than the previous growth of 0.3% reported for December 2022.

The annualized Core PCE Price Index for January is foreseen at 4.3%, a tad lower from the 4.4% one reported in December’22. That was the slowest annual rate of increase since October 2021.

Meanwhile, the headline Personal Consumption Expenditures Price Index is expected to jump by 0.5% MoM in January while annually, the gauge is foreseen by market consensus slightly lower at 4.9%, a tad lower than the 5.0% registered in December.

The increase in the monthly figures is mainly expected on the back of potentially robust Personal Income and Personal Spending data. The report is set to affirm that the United States consumer remains alive and kicking, having indicated previously that the economy slowed at the end of 2022.

The US Federal Reserve (Fed) watches the headline number. But officials have said repeatedly that core PCE usually provides a better long-term indicator of where inflation is headed because it strips out prices that can be volatile over shorter time periods.

Besides, investors will closely scrutinize the comments from Fed Governor Philip Jefferson and Cleveland Fed President Loretta Mester, especially after Mester said last week: ‘I saw a compelling economic case’ for a half-point rate rise at the last meeting.

Analysts at Credit Suisse analyze how the data release might shift Fed policy expectations: 

“We anticipate an above-consensus acceleration in both headline and core PCE, from 0.1% MoM and 0.3% MoM in Dec to 0.6% MoM and 0.5% MoM respectively. If realized, these readings would be seen as reinforcing hawkish Fed policy risks, and on the margin might bring further weight to the scenario of a 50 bps hike in March. At the same time, weaker than expected reading would represent a more substantial surprise relative to now more hawkish consensus, and as such needs to be considered as a tactical tail risk. This said we suspect that the bar for a downside PCE surprise to trigger an actual challenge of the recent shift in Fed policy expectations is very high. A particularly weak data surprise would also likely lead to speculation about possible ‘technical’ reasons behind it, which might undermine its credibility and ultimately its market impact.”

When will be the Personal Consumption Expenditures Price Index report and how could it affect EUR/USD?

The PCE Inflation report is scheduled for release at 13:30 GMT, on February 24. Against the backdrop of strong US Nonfarm Payrolls and hot Consumer Price Index (CPI) data, a higher-than-expected increase in the monthly Core PCE could fan expectations of three more Fed rate hikes this year. It’s worth noting that economists at Goldman Sachs said earlier this month that they are now forecasting the Fed to hike rates by 25 basis points (bps) each at the March, May and June meetings. The US banking giant had previously projected just two rate hikes ahead.  

As a result, the US Dollar could witness a fresh leg higher and deepen the pain in the  EUR/USD pair. The main currency pair touched the lowest level in almost a week at 1.0612 on Tuesday.

Conversely, downbeat PCE inflation data could pour cold water on the heightened hawkish Federal Reserve interest rate hike expectations. This could snap the ongoing recovery momentum in the Greenback. The market reaction, however, is likely to remain limited as investors will look forward to the February labor market report and the CPI data for fresh hints on the Fed’s tightening outlook.

Dhwani Mehta offers a brief technical outlook for the major and explains: “EUR/USD is defending the critical daily support line at 1.0578 heading into the US PCE inflation showdown. The 21-Daily Moving Average (DMA) is on the verge of cutting the flattish 50 DMA from above, which if materialized could confirm a bear cross. The 14-day Relative Strength Index (RSI) is keeping its range below the midline.”

In face of these unfavorable technical indicators, the pair remains exposed to downside risks, with a test of the 1.0550 psychological mark inevitable on a sustained break below the abovementioned falling trendline support,” Dhwani explains. 

Dhwani adds, “EUR/USD buyers need to take out the previous day’s high at 1.0627 to initiate a meaningful recovery toward the static resistance at around 1.0700. The confluence zone of the 21 and 50 DMAs near the 1.0735 region will be next on their radars.”

PCE inflation-related content

• US Core PCE Preview: USD momentum to gather traction on an upside print – OCBC
• EUR/USD: Steady losses over the past week look set to extend – Scotiabank
• Dollar’s bounce may have ground on a bit further – SocGen

About the Core Personal Consumption Expenditures Price Index

The US Bureau of Economic Analysis releases the Core Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred measure of inflation. A higher-than-consensus number on PCE typically means that consumers are spending more money in a basic pool of products than experts had predicted. A more realistic picture of pricing behavior is provided by excluding the prices of products with variable prices, such as food and energy, from the "core" reading. If the figure is greater than anticipated and thus indicates that inflation is increasing, it might lead to the Federal Reserve eventually tightening its monetary policy, which increases the value of the US Dollar.

When is the next United States Core Personal Consumption Expenditures - Price Index (MoM) scheduled to be released?

The next release of the United States Core Personal Consumption Expenditures - Price Index (MoM) is scheduled for Friday, March 23rd, at 12:30 GMT. The US Bureau of Economic Analysis will post the Fed preferred inflation numbers together with the Personal Income and Spending data.