Forward Guidance Newsletter

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The Fed’s preferred inflation gauge inched down slightly in January, but it remains distant from the 2% target.

Decreased consumer spending alongside sharp income growth complicates the central bank’s mandate and poses challenges for those expecting a quarter of economic expansion.

Here’s a rundown of the latest personal consumer expenditures (PCE) report and its implications for interest rates, markets, and economic growth.

The PCE index rose 2.5% annually in January, down from 2.6% in December. Core PCE, excluding volatile food and energy costs, saw a greater decline at 2.6% in January compared to 2.9% in December.

Personal income increased by 0.9% month-over-month, driven by private wages and salaries, according to the Bureau of Economic Analysis. Additionally, personal current transfer receipts, reflecting payments made without the exchange of services, also saw a significant increase, largely due to adjustments in Social Security payments at the start of the year.

Consumer spending fell by 0.2% in January compared to the previous month, with notable declines in the sectors of motor vehicles, household furnishings, and recreational goods.

This latest data has significantly lowered expectations for Q1 GDP growth. The Atlanta Fed’s GDPNow model has been revised to project a contraction of 1.5% in the US economy for the first three months of 2025, marking the first contraction since Q1 2022. Previously, on Feb. 19, the model had anticipated a growth rate of 2.3% for the first quarter of this year.