Fed's Preferred Inflation Measure Bounces In January: What You Need To Know

The SPDR S&P 500 ETF Trust SPY (NYSE: SPY) traded lower on Friday morning after the Bureau of Economic Analysis reported a 5.4% increase in the personal consumption expenditures (PCE) price index in the month of January, another signal the Federal Reserve has hit a speed bump in its battle against inflation.

What Happened: The headline PCE rose 5.4% in January on a year-over-year basis. That's up from 5.3% in December and a 2022 high of 7% in June.

The January PCE reading came in above economist estimates of 4.9%.

Core PCE, which excludes volatile food and energy prices and is the preferred inflation measure for the Federal Reserve, was up 4.7% in January, above economist estimates of 4.3% but well below its 2022 high of 5.2% in September.

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The Federal Reserve is likely closely monitoring the PCE data ahead of its March meeting. The bond market is pricing in a 76% chance the Fed will raise interest rates by another 0.25% next month, bringing its fed funds target range to between 4.75% and 5%.

The yield on 10-Year U.S. Treasury bonds was up 0.04% on Friday morning to 3.92% but is down from a peak of more than 4.2% back in November.

The S&P 500 is off to a strong start to 2023 on investor optimism the Fed may be able to pivot from rate hikes to rate cuts sooner than expected.

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Earlier this month, the Labor Department reported the Consumer Price Index (CPI) was up 6.4% in January, down from a 2022 peak of 9.1% in June. The Labor Department also reported U.S. wages grew 4.4% year-over-year in January.

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