Fed’s favorite inflation gauge up 5.2% for biggest annual gain since 1983

A key inflation measure showed that prices rose at their fastest level in nearly 39 years, but it didn’t deter consumers from spending aggressively, the Commerce Department reported Friday.

The core personal consumption expenditures price index, the Federal Reserve’s primary inflation gauge, rose 5.2% from a year ago, slightly more than the 5.1% Dow Jones estimate. It was the highest level since April 1983.

Including food and energy prices, headline PCE was up 6.1%, the strongest gain since February 1982.

On a monthly basis, core PCE rose 0.5%, in line with estimates, while the headline gain was up 0.6%.

The same report showed that consumer spending accelerated faster than expected, rising 2.1% on the month against the 1.6% estimate. The spending increase reversed a 0.8% decline in December.

That came even though personal income was flat for the month, which was better than the expectation for a drop of 0.3%. After-tax, or real disposable, income fell 0.5% as the expiration of a child tax credit offset wage gains and a large adjustment to Social Security checks.

Personal savings totaled $1.17 trillion, which translated into a 6.4% rate, the lowest December 2013.

A separate report also brought more better-than-expected news: Orders for long-lasting goods jumped 1.6% in January, compared with the outlook for a 0.8% gain.

For markets, inflation has been front and center as price gains have persisted at the strongest levels since the runaway increases in the 1970s and early 1980s. Back then, the Fed had to institute a string of stifling interest rate rises that dragged the economy into a recession.

In the current case, policymakers also have indicated that hikes are coming, though they are hoping to tighten in a more deliberate way. Virtually all central bank officials have said they expect to start the increases in March, and markets expect hikes to come at most if not all the ensuing six meetings this year.

“Overall, the real economy appears to be in stronger health than we feared, suggesting that the Fed will push on with its planned rate hikes starting in March, although the Ukraine conflict makes a 50 [basis point] hike less likely,” wrote Paul Ashworth, chief U.S. economist at Capital Economics.

The data released Friday showed that energy increased at a 1.1% pace in January, while food costs rose 0.9%. Services inflation cooled off slightly, rising 0.4%.

Inflation fed through to worker pay, with wages and salaries surging 9.3% in 2021 after increasing just 1.3% the year before. Those costs rose another 0.5% in January, a slightly slower rate than the 0.7% increase the month before.

That infusion of money has kept demand for goods high.

Excluding transportation, new orders still rose 0.7%. Ex-defense orders were up 1.6%.