US inflation rise fuels expectations Fed will keep raising rates

Wall Street rattled as inflation report comes in hotter than expected

A key inflation gauge preferred by the Federal Reserve ticked up for the month of January. AP

Futures on Wall Street fell sharply after a key measure of inflation ticked higher in January, adding to expectations that the US Federal Reserve will keep raising interest rates this year.

The Personal Consumption Expenditures price index report released by the Commerce Department on Friday showed that prices rose 0.6 per cent from December to January. On a year-on-year basis, the PCE increased from 5.3 per cent in December to 5.4 per cent in January.

Core PCE, which excludes food and energy, also climbed 0.6 per cent. Both reports exceeded forecasters' estimations.

Meanwhile, consumer spending surged to 1.8 per cent after falling in December.

Friday's data show that inflation continues to grip the economy despite the Fed's aggressive efforts to control it.

The central bank has raised interest rates eight times from a near-zero level in March 2022 to its current range of 4.5 per cent to 4.75 per cent.

Stocks on Wall Street slid following the report's release.

The Dow Jones dropped 435 points (or 1.31 per cent). The S&P 500 and Nasdaq Composite dropped 1.5 per cent and 1.81 per cent, respectively.

Traders also expect the Fed to raise interest rates by a quarter of a point for their next three meetings, CME's FedWatch Tool shows, which would exceed the bank's end-of-year median estimate.

Last week's Consumer Price Index report showed that consumer prices rose by 6.4 per cent year-on-year in January, a step down from last summer's 9.1 per cent peak but still stubbornly above the Fed's long-term 2 per cent goal.

The Fed prefers monitoring the PCE to determine its monetary policy because it provides a more thorough understanding of consumer behaviour.

The central bank has been attempting to navigate a so-called soft landing by slowing the economy without driving it into a recession.

Recently released government data show that the economy remains resilient, particularly in the jobs market. Fewer workers applied for jobless claims last week than expected and the nation's 3.4 per cent unemployment rate is at a 53-year low.

And while a revised gross domestic product estimate released on Thursday was slightly weaker than first expected, the economy still grew at 2.7 per cent in the fourth quarter of 2022.

Policymakers are scheduled to hold their next Federal Open Market Committee from March 21-22.