The U.S. Commerce Department reported on Friday that the Personal Consumption Expenditures (PCE) Price Index for January rose largely as expected, reinforcing the view that inflation remained relatively contained even as geopolitical tensions in the Middle East escalated following the war with Iran that began last month.
On a month-over-month basis, the headline PCE Index increased 0.3% in January, matching economist expectations and slowing from a 0.4% gain in December. The so-called core PCE Price Index, which excludes volatile food and energy components, rose 0.4% for the month, also in line with estimates.
Over the 12 months through January, headline PCE inflation stood at 2.8%, slightly below expectations of a 2.9% increase. The 12-month change in the core PCE Price Index measured 3.1% in January, consistent with forecasts and following a revised 3.0% rise in the core measure for December. The Federal Reserve uses the PCE price measures in framing its 2% inflation target.
In a separate release, the Commerce Department's second estimate of gross domestic product showed that the U.S. economy expanded at an annualized rate of 0.7% in the fourth quarter, below the 1.4% growth that had been expected by economists. The revised growth figure came alongside downward revisions to consumer spending for the quarter.
Market reaction
- Stocks: U.S. equities climbed after the data, with futures tied to the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite rising about 0.4%.
- Bonds: U.S. Treasury yields retreated; the 10-year yield fell roughly 2 basis points to 4.25%, while the two-year yield, which tends to reflect expectations for Federal Reserve policy, dropped about 6 basis points to 3.70%.
- Forex: The dollar index edged higher, up 0.3% to 100.32.
Commentary from market participants
"We have a mixed bag of macro news here. Of course, the downward revision of GDP was much more than expected and that’s not good news, along with the fact that consumer spending was revised downward. The good news is that the inflation data measured by the PCE basically in line with expectations. ... Inflation remains elevated, sticky and with the possibility of energy prices eventually moving into the pipeline, the Fed is likely to stay on hold for a longer period of time."
That commentary highlighted the dichotomy facing markets: softer growth readings alongside persistent inflation that could keep monetary policy on a cautious trajectory.
"Most of today’s economic numbers were generally in line with expectations with the exception of durable goods orders, which was weak and the GDP estimate which was also weak. There’s some concern about the economy from these numbers. These are numbers worth looking at and they question the strength of the U.S. economy. War issues in the Middle East are the most important determinant of financial markets at the moment."
Market strategists emphasized that while inflation metrics largely matched forecasts, weak data on economic activity and durable goods orders raised questions about the underlying strength of demand. Geopolitical developments in the Middle East were cited as a key factor influencing investor positioning and market sentiment.
What the data means
The January PCE release suggests inflation pressures have not accelerated beyond recent patterns, with both headline and core monthly prints coming in line with economist projections. At the same time, the softer-than-expected second estimate for fourth-quarter GDP, coupled with downward revisions to consumer spending, signals a more cautious reading of recent economic momentum.
Investors processed the mix of outcomes by pushing equity futures higher while moving into the relative safety of Treasuries, which sent yields lower, even as the dollar strengthened marginally. The interplay between sticky inflation, the Fed's inflation target framework and signs of slowing growth will be watched closely by market participants in the weeks ahead.