A key indicator of inflation showed another increase in prices for January as Americans gird for more economic turbulence exacerbated by Russia’s invasion of Ukraine.
The personal consumption expenditures index – or PCE – which is put out by the Department of Commerce and is considered the preferred measure of inflation by the Federal Reserve, rose to 5.2% in January when compared to the previous year.
In the 12 months through January, the PCE price index has jumped 6.1%. That was the largest rise since February 1982 and followed a 5.8% year-on-year increase in December.
The data from the Commerce Department coupled with the unfolding crisis in Eastern Europe is likely to spur the Fed to hike interest rates at a greater pace than anticipated.
That’s because Russia is a big global producer of oil and any disruption to its output through either sanctions or strife could send oil prices sharply higher. Already oil prices have moved higher in anticipation of trouble coming down the line.
Higher oil prices can filter to the US consumer through more expensive gasoline and other energy costs – like heating oil. Rises in those prices would only push inflation higher – and push the Federal Reserve to increase interest rates to smother price increases.
“Despite the war in Ukraine, the Fed is going to be forced to raise interest rates next month and they will have pressure to raise rates… at the same pace or quicker than would have been the case had Russia not invaded Ukraine,” Chris Zaccarelli , chief investment officer for Independent Advisor Alliance, told The Post.
The Russian invasion of Ukraine has stoked fears that the oil market could see further shocks. Crude surged past $ 105 a barrel on Thursday.
Meanwhile, in the next two weeks, the average price of a gallon of gasoline in the US could reach $ 3.75. If the geopolitical tumult continues, it could hit $ 5 a gallon within months, experts warn.
These factors will only steel the Fed’s resolve to raise interest rates, observers say.
“Prior to the return of inflation, the Fed would have less urgency to raise rates in the face of war or other threats to economic growth, but in this situation, with inflation likely to be exacerbated by disruptions due to war, the Fed needs to do the opposite of what they would normally do and that’s to fight an even bigger threat of inflation, ”Zaccarelli said, noting the effect on oil markets.
The PCE reported on Friday differs from the consumer price index, or CPI, that is released by the Labor Department. The CPI reading is even higher: It rose to 7.5% in January – which is also the fastest rate since 1982. Unlike CPI, the core PCE does not include volatile food and energy prices.
Meanwhile, American household spending jumped by 2.1% in January, surpassing the 0.8% in December. When adjusted for inflation, consumer spending jumped 1.5% in January after declining 1.3% in December.
“Never underestimate the American consumer,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.