Key Takeaways
- Core PCE inflation is expected to decelerate to its lowest annual increase since June, providing hope that inflation is settling down to pre-pandemic levels.
- Friday’s report could allay some fears generated by an earlier inflation report this month that cost-of-living increases were re-accelerating.
- The threat of President Donald Trump’s tariffs looms over inflation forecasts, as economists expect taxes on imports to push up inflation if they are implemented.
The Federal Reserve’s preferred measure of inflation likely decelerated in January, providing some reassurance that cost-of-living increases are slowing down to pre-pandemic levels.Â
A report Friday is likely to show the cost of living, as measured by Personal Consumption Expenditures, rose 2.4% over the 12 months ending in January, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. The Bureau of Economic Analysis data is likely to show a slowdown from the 2.6% increase in December.
The median forecast calls for core PCE inflation, which excludes volatile prices for food and energy, to fall to a 2.6% annual increase from 2.8%, hitting its lowest since June.
A forecast in line with expectations could help reassure financial markets that the post-pandemic burst of inflation, which roiled the economy beginning in 2021, is on its last legs. In recent months, inflation has proved stubborn, causing officials at the Federal Reserve to put plans of cutting borrowing costs on ice for the time being.
A decline in PCE inflation could be especially noteworthy given that the Fed values PCE more as a gauge of inflation pressures than the more widely reported Consumer Price Index, which unexpectedly surged in January. The Fed has kept interest rates elevated to slow the economy and force inflation back to its 2% annual rate goal, as measured by core PCE.
A result in line with expectations would “should reduce concerns from late last year about a lack of progress toward the 2% goal,” David Mericle, senior economist at Goldman Sachs, wrote in a commentary.
Cooling PCE inflation would also add to economists’ suspicions that the jump in CPI inflation in January was at least partly a data fluke rather than a real acceleration of consumer prices.
The Big ‘If’ For Inflation: Tariffs
Although inflation may be coming down, President Donald Trump’s economic policies could cause it to shoot back up again.
Specifically, economists are concerned about the president’s announced tariffs. He’s proposed taxing imports of goods from Mexico and Canada, all steel and aluminum, and unspecified “reciprocal” tariffs against countries that charge taxes on U.S. imports. These tariffs are all set to go into effect in the coming months.
Many economists believe U.S. consumers would ultimately pay the price for those tariffs, driving inflation higher.