Annual inflation measures are easing and, on Thursday, the Federal Reserve’s favored measure — the Personal Consumption Expenditures (PCE) index — was released, showing a drop to 2.4% in January, matching expectations and edging towards the Fed’s 2% target.

Core PCE inflation, stripping out food and energy costs, eased to 2.8% as expected, but monthly measures rose by more than expected.

While personal income gathered pace, rising 1% — well above the 0.3% climb seen in December and higher than the 0.4% rise expected — most analysts put this down to the one-off impact of a rise in social security payments.

The data provoked a mixed response from analysts, but most were optimistic that the Fed had won the battle against inflation and that it would soon be back at the central bank’s target.

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Initial Responses Posted On X:

Joseph Brusuelas, chief economist at RSM US, said the Fed would remain on track for a June rate cut.

“We were not part of the crew that was forecasting a March cut with six cuts overall. Our forecast was always June with four cuts this year,” he said.

The main risk to this thesis, he said, “revolves around fewer cuts based on a stronger pace of income, spending and overall growth this year.”

The Kobeissi Letter, a global financial market commentator, said it was “interesting” that while inflation measures such as the consumer price index (CPI) has risen, the PCE measure continues to fall.

“If the Fed can get Core PCE inflation to 2% this year, it would be a huge win.”

The Quant Guy, former hedge fund manager Jeff Bierman, said that despite the Fed’s target being set at 2%, consumer inflation expectations remain stuck at 3%.

“Based on the current economic indicators, I firmly believe that the Federal Reserve will be unable to cut interest rates anytime soon.

“The NFIB Survey indicates that many companies are still increasing their prices. The U.S. consumer still has easy access to credit, which is keeping aggregate demand remarkably strong. Therefore, with these solid economic data, I am confident that inflation cannot stay consistently at 2%.”

Additional Analyst Notes Arrived:

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he saw no reason to change his view that core inflation is falling and will continue to fall.

“But the Fed is hyper-cautious after the ‘transitory’ fiasco and a sustained run of relatively elevated core CPI/PCE prints increases the chance that the first easing is delayed beyond our May forecast,” he added.

James Knightley, chief international economist at Dutch bank ING, said that inflation remained too hot, but softening fundamentals pointed to an eventual cooling.

He added: “Cooling incomes and spending suggest inflation will moderate again in coming months, leaving the door open to a June Federal Reserve rate cut.”

Jamie Cox, managing partner for Harris Financial Group, said that inflation was continuing to trend lower.

He added: “The concerns about a reacceleration of inflation are overblown.  The Federal Reserve is accumulating a sufficient number of data points to cut rates by July.”

Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said this was a highly-anticipated number given the rise in the previous month’s CPI data.

“Fortunately, this morning's data didn't come in hotter than expected and is a sigh of relief for Bulls, who were worried inflation was going to reaccelerate and cause the Fed to put off rate cuts for a much longer time, or even worse, begin raising rates again.”

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