December, prior months revised higher. Goods prices jump month-to-month by most since August 2023, turn positive for first time in a year.
By Wolf Richter for WOLF STREET.
The inflation measure released today – the PCE price index favored by the Fed as yardstick for its inflation target – jumped by 0.33% in January from December, or by 4.0% annualized, the worst month-to-month increase since March 2024. And this was on top of the upwardly revised December increase.
So, the 3-month PCE price index accelerated to +2.94% annualized, the worst increase since April 2024. The low point of the three-month index was in July (+1.6% annualized), and it has been accelerating ever since. The chart shows the month-to-month changes (blue) and the three-month changes (red), all annualized.
The 6-month PCE price index accelerated to +2.6% annualized, the worst increase since June 2024.
The core PCE price index, which excludes food and energy items, accelerated to +0.28% in January from December, or 3.5% annualized, the worst increase since October, and before then since March 2024.
The 6-month core PCE price index accelerated to +2.6%, the biggest increase since July 2024.
The core services PCE Price Index, which excludes energy services, decelerated in January, pushed down by three sub-indices that had month-to-month declines (negative readings).
On a month-to-month basis, this is very volatile data, except for the housing index. And these individual month-to-month changes tend to spike and plunge. So these are the changes in January from December, annualized:
Three subindices of services had negative readings:
- Healthcare services (-1.5% annualized)
- Transportation services (-4.9% annualized)
- Insurance (-5.1% annualized)
Four subindices of services accelerated:
- Housing index (+3.9% annualized).
- Food services index (+4.8% annualized)
- Non-energy utilities (+8.0% annualized)
- Recreation services (+14.6%)
Two subindices decelerated:
- Financial Services (+7.3% annualized).
- Other services (+1.9% annualized)
The PCE price index for housing, which is part of core services, rose by 3.9% in January from December, the second month of acceleration. The six-month index decelerated to 4.2%
The base effect, as always, but this time it was big.
The year-over-year change in January was the sum of the 12 month-to-month changes of February 2024 through January 2025. The December year-over-year increase was the sum of changes from January 2024 through December 2024.
In January 2024, the services PCE price index had spiked month-to-month by 0.68% (the off-the-chart 8.5% annualized). This high reading of 0.68% fell out of the 12-month time frame of the year-over-year change in January 2025, and was replaced by the January 2025 reading of 0.24%. And this caused the year-over-year change to decelerate to 3.4%.
This is the infamous “base effect.” It happens with all year-over-year measures every month. And it’s usually not big. But this time in services, it was big and deserves this special mention (yellow in the chart below).
Because the services index weighs so heavily, it caused the year-over-year readings of the core PCE price index (blue) and of the overall PCE price index (red) to decelerate as well. Details below the chart:
The PCE price index decelerated a tad to 2.51% in January, from 2.60% in December, after three months of acceleration. The Fed’s target for this measure is 2%.
The “core” PCE price index decelerated to 2.65% in January from 2.86% in December, which was rounded to 2.6% in January from the upwardly revised 2.9% in December (originally reported as 2.8%).
The “core services” PCE price index decelerated to 3.42% (see the base effect above), from the upwardly revised 3.87% in December.
The durable goods PCE price index became less negative, declining by 1.16% year-over-year in January, the smallest decline since July 2023.
The durable goods category is dominated by new and used vehicles, and includes appliances, furniture, computers, cellphones, other consumer electronics, sporting goods, such as bicycles, etc.
The all-goods price index.
The PCE Price index for all goods, including durable goods, apparel and shoes, food, energy products, household supplies, etc. jumped by 0.5% in January from December (6.2% annualized), the biggest month-to-month increase since August 2023.
Year-over-year, the goods index accelerated from negative readings to +0.6% in January, thereby becoming positive for the first time in a year. It was the biggest year-over-year increase since September 2023.
Year-over-year changes of major goods categories:
- Durable goods: -1.2%
- Food: +1.6%
- Energy products (dominated by gasoline): +0.4%
- Apparel & footwear: +1.1%
The gold box marked the period of Trump’s first round of tariffs. As we can see, companies overall were largely not able to pass them on to consumers, though they tried – creating wild and wooly headlines in the media – but consumers refused to buy those products with higher prices, and companies ended up rolling them back [we discussed this here: What Trump’s Tariffs Did Last Time (2018-2019): No Impact on Inflation, Doubled Receipts from Customs Duties, and Hit Stocks].
Note that the tariffs Trump is now talking about, and even those that were announced in January, have not hit the goods that consumers bought in January. Those goods, if imported, came into the US before January, before any new tariffs were implemented.
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I wonder, is there a measurable effect of business uncertainty about tariffs? I guess, as you indicated, last time the tariffs came largely out of corporate profits, percolating through in stock prices. Where are the fabled drunken sailors, to bail us out? Are they getting scarce? Buying the dip today maybe?
Hi all,
Based on the services dip in inflation with the January base effect the Fed will claim the job on inflation is going well downward. They can’t raise rates going forward. But now the market is concerned about growth scare. Let’s see what happens with that. Yields lower seem to happen bc of that
“Where are the fabled drunken sailors, to bail us out? Are they getting scarce?”
Seems to me like they’re still at it. Hot off the press:
No, Consumer Spending Didn’t Plunge in January and Auto Sales Didn’t Collapse, or Whatever, But the Huge Seasonal Adjustments Might Have Gone Awry.
Year-over-year, consumer spending jumped by 5.6% and retail sales by 4.8% in January. So there’s that.
I really dislike the way the Federal Reserve uses PCEPI as its main benchmark, after switching to it from CPI in the 2000s.
The PCEPI is not a cost of living index, but a GDP deflator. It includes costs paid by consumers, businesses as well as governments, the last of which isn’t as price-sensitive. It’s distorted by quality adjustments & substitution effects. Shelter is only 10-15% which is far lower than the average middle class family spends on rent & mortgages.
As a result, PCE almost always runs lower than CPI, often by 0.5-1% for much of this cycle, so it gives the Federal Reserve a much easier target to reach.
Many other countries don’t have this distinct metric – their central banks just use CPI.
It’s interesting how the economy was booming during Q4 2024 when the Federal Reserve was lowering rates … but now that they’re on hold again due to still-elevated inflation, every CNBC & WSJ analyst is doom & gloom.
Seems to me like consumers are still at it. Hot off the press:
No, Consumer Spending Didn’t Plunge in January and Auto Sales Didn’t Collapse, or Whatever, But the Huge Seasonal Adjustments Might Have Gone Awry.
Year-over-year, consumer spending jumped by 5.6% and retail sales by 4.8% in January. So there’s that.
First few months of the year always seems to be higher… I’d still use the YoY. Positive news overall, but not optimistic of tariffs even if they didn’t lead to significantly higher inflation last time round.
Tariffs, unless compounded, as Wolf Richter has shown are not inflationary.
I hope President Trump did not overplay his hand sending Zelensky out of the White House with no Ukrainian mineral rights. The world stage is not the American public.
Great job J Pow! 4 years now with inflation above your bogus and illegal 2% target. So much for “price stability”. Good thing you poured gasoline in the fire buying MBS. I wonder how many more years our dollars will lose value like this?
In 2018, President Trump applied tariffs on primarily steel (25%) and aluminum (10%) and then used this as a bargaining chip to re-negotiate NAFTA into the USMCA to the benefit of America. I was on a Navy project in Canada and my oh my, we had some exciting ($) times as we used the specialized imported steel from the US!
This time is seems different with everything being tariffed and this impacts pretty much everyone. In 2018, one could hedge or shift the risk somewhat on steel, but most businesses are unfamiliar with hedging and are facing prices. I fear “demand destruction” which will slow economic growth at a time that many businesses are still trying to get their footing after Covid.
You need to get a list of the goods, including consumer goods, from China that were tariffed in 2018.
So here is the final list from the USTR, a 194-page PDF, of the goods imported from China that were tariffed in 2018.
https://ustr.gov/sites/default/files/enforcement/301Investigations/Tariff%20List-09.17.18.pdf
Higher for longer then? Good…what would be even better? Even Higher for longer? Perhaps slightly above inflation isn’t doing the trick if they are serious about getting back to 2% asap…
Then again any decent plans to try to tackle inflation in meaningful way might all just be go down the drain once toddler start to cry about lower interest rates again…probably while he confuses short and long term yield differences and causing more chaos…it will be an interesting ride for the next couple of years to be it extremely nicely.