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Fed inflation gauge heats up, raising pressure on officials to tighten policy

The Federal Reserve’s preferred inflation gauge registered another strong monthly gain, in the latest sign that the US central bank needs to reduce the ultra-easy monetary policy that has been in place since the start of the pandemic.

The core personal consumption expenditures price index increased another 0.5 per cent in January, following a similar monthly increase in December, according to the commerce department on Friday.

That translated to an annual increase of 5.2 per cent, the fastest pace in roughly four decades and an acceleration from the 4.9 per cent increase recorded in December.

Once volatile items such as food and energy are factored in, the PCE index jumped 6.1 per cent from the same time last year, or 0.6 per cent on a month-over-month basis.

Fed officials are monitoring inflation data closely as they assess how quickly to raise interest rates this year from today’s near-zero levels.

Personal incomes were flat for the month, and rising price pressures were accompanied by a 2.1 per cent rise in household spending at the start of the year.

The data come on the heels of Russia’s invasion of Ukraine, which has left policymakers rushing to discern the potential economic effects.

The US central bank is still expected to proceed with its first interest rate increase at its next meeting in the middle of next month despite the recent turmoil, and investors still anticipate a further five quarter-point adjustments during the remainder of the year.

Several officials have spoken out in recent days about potential risks to economic growth and the inflation outlook stemming from intensifying geopolitical tensions, but they appear unwavering about the need to move policy away from its ultra-easy settings.

Energy prices have soared since the Russian invasion of Ukraine, with Brent crude breaking through $100 a barrel for the first time since 2014, when Russia annexed Crimea. Further gains in energy costs could feed through to prices at the pump and send overall inflation higher, economists say, complicating the Fed’s equations.

Raphael Bostic, president of the Atlanta Fed, said on Thursday that while he was watching events in Ukraine closely, it was “appropriate” for the Fed to move away from its emergency policy stance.

Mary Daly, San Francisco Fed president, and Thomas Barkin of the Richmond Fed, have expressed similar views, as has Loretta Mester, president of the Cleveland Fed and a voting member of the Federal Open Market Committee this year.

Christopher Waller, a Fed governor, backed an even more aggressive approach, sketching out the need for a half-point interest rate increase next month if price pressures intensify. He also backed the central bank’s main policy rate rising by 1 percentage point by the middle of the year.

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