January Inflation Data Amid Rising Oil Prices

Fed’s Key Inflation Gauge Rises in January as Core Prices Hit Nearly Two-Year High​

The Federal Reserve’s preferred inflation gauge showed persistent price pressures in January, even before geopolitical tensions triggered a sharp surge in global energy costs.

Data released by the U.S. Commerce Department on Friday showed that inflation, measured by the Personal Consumption Expenditures (PCE) price index, rose 2.8% in January from a year earlier. The reading was slightly lower than the increase recorded in December, after a backlog of delayed data caused by a six week government shutdown last fall was largely cleared.

Core Inflation Climbs to Highest Level in Nearly Two Years​

Underlying inflation remained firm. The core PCE index, which excludes the volatile food and energy categories and is closely watched by the Federal Reserve, rose 3.1% year on year in January, up from 3% in December. This marks the highest core inflation reading in nearly two years, signaling that price pressures remain stubborn.

On a monthly basis, overall prices increased 0.3% in January, while core prices jumped 0.4% for the second consecutive month. If sustained, that pace would exceed the Fed’s 2% annual inflation target, reinforcing concerns among policymakers about lingering inflation risks.

Iran Conflict Adds Fresh Inflation Risks​

The January inflation data comes before the latest geopolitical developments that could further drive prices higher.

The conflict involving Iran, which began on February 28, has disrupted global energy markets after the Strait of Hormuz was shut down, blocking roughly one fifth of the world’s oil supply. Since the conflict started, oil prices have surged more than 40%, while U.S. gasoline prices have climbed to about $3.60 per gallon from just under $3 a month earlier, according to AAA.

Economists expect these developments to push inflation higher in March and possibly April.

Federal Reserve Likely to Hold Rates Steady​

The Federal Reserve has maintained elevated interest rates in recent months to slow borrowing, spending, and economic growth as part of its strategy to control inflation.

Policymakers are scheduled to meet next week, and markets widely expect the central bank to leave its benchmark interest rate unchanged, particularly as the Middle East conflict threatens to push inflation higher in the near term.

Consumer Spending and Income Remain Strong​

Despite elevated inflation, U.S. consumers continued to spend steadily in January.

Consumer spending rose 0.4% during the month, matching December’s increase and highlighting continued resilience in economic activity. Household consumption accounts for about two thirds of the U.S. economy, making it a key driver of growth.

Meanwhile, personal incomes also increased by 0.4%, suggesting consumers did not need to rely heavily on savings to support their spending.

After tax income rose more sharply, jumping 0.9%, largely due to a substantial increase in Social Security benefit payments following a cost of living adjustment implemented at the start of the year.

PCE vs CPI: Why the Fed Prefers This Inflation Gauge​

The report focuses on the PCE price index, which differs from the more widely cited Consumer Price Index (CPI) that was released earlier in the week.

The PCE measure places less emphasis on housing costs such as rent, which have been easing in recent months. Because of this difference in weighting, the PCE index is currently running hotter than CPI, even though it typically trends lower than the CPI measure.