Volkswacht Bodensee - US Fed's favored inflation gauge cooled slightly in January

The personal consumption expenditures (PCE) price index rose 2.5 percent in the 12 months to January, the Commerce Department said in a statement, down slightly from a month earlier. Inflation rose 0.3 percent on a monthly basis.

This was in line with the median forecasts from economists surveyed by Dow Jones Newswires and The Wall Street Journal.

"In general, this was a neutral reading for the PCE," CFRA's Sam Stovall told AFP. "Investors are breathing a sigh of relief because they didn't want to end the week with a lot of drama."

Inflation was a key issue ahead of November's US presidential election, which Donald Trump won convincingly, in part on a pledge to lower both inflation and the cost of living.

Friday's data underscores the challenges his administration now faces as it seeks to reduce real prices while simultaneously threatening to impose steep tariffs on goods coming into the United States -- which many economists see as inflationary.

Stripping out volatile food and energy costs, the so-called core index rose by 0.3 percent from a month earlier in January, and by 2.6 percent from a year ago -- down slightly from December.

While inflation has remained stuck above the bank's long-term two percent target, economic growth has remained robust, and the labor market has stayed healthy, with unemployment hugging close to historic lows.

The Fed recently voted to pause rate cuts, holding its key lending rate at between 4.25 and 4.50 percent and signaling it expects a slower pace of cuts ahead.

Friday's data is unlikely to change the Fed's current plan of action, given where the inflation data remains.

Personal income rose 0.9 percent in January from a month earlier, the Commerce Department said, while personal saving as a percentage of disposable personal income rose sharply to 4.6 percent.

As inflation remains elevated, financial markets still overwhelmingly expect the Fed to hold off on rate cuts again next month, according to data from CME Group.

"Inflation is back under the Fed's microscope and is more stubborn than policymakers had hoped," Nationwide financial markets economist Oren Klachkin said in a statement.

"With inflation risks tilted to the upside and growth risks tiled to the downside, the Fed will stay on the sidelines until it has greater clarity on the inflation and economic policy outlook," he added.

A prolonged pause in cuts could put the Fed at odds with Trump, who has voiced a desire for interest rates to fall further.

H.Gerber--VB