Hotter Inflation Data Presents ‘Worrisome News’ for US Economy, Economists Warn

Mohamed El-Erian, Chief Economic Adviser of Allianz appears on a segment of "Mornings With Maria" with Maria Bartiromo on the FOX Business Network at FOX Studios in New York City on April 29, 2016. Rob Kim/Getty Images

The Personal Consumption Expenditures (PCE) Price Index–the Federal Reserve’s preferred inflation gauge–came in higher than market estimates, which could be “worrisome news” for the U.S. economy, says  economist Mohamed El-Erian.

The annual PCE Price Index rose to 5.4 percent in January, up from an upwardly revised 5.3 percent in December, according to the Bureau of Economic Analysis (BEA). This was higher than economists’ expectations of 4.8 percent. On a month-over-month basis, PCE prices rose 0.6 percent, double the consensus of 0.3 percent.

The core PCE Price Index, which eliminates the volatile food and energy sectors, edged up to 4.7 percent year-over-year, up from 4.6 percent. In addition, core PCE prices jumped 0.6 percent month-over-month, up from 0.4 percent. Both readings were higher than market forecasts.

Following the report, economists expressed concern for the broader economy.

“Often cited as the #Fed’s favorite inflation measures, the latest PCE numbers are unsettling,” El-Erian, the president of Queens’ College, Cambridge University, wrote on Twitter. “This is worrisome news for the economy, livelihoods and markets.”

Experts fear that this month’s PCE Price Index and other measurements might suggest inflation is stickier than many had hoped.

Shoppers in a supermarket are feeling the pinch as rising inflation affects consumer prices in Los Angeles, Calif., on June 13, 2022. Lucy Nicholson/Reuters

Last month, services and energy prices advanced 5.7 percent and 9.6 percent, respectively, compared with the same time a year ago. This was comparable to the consumer price index (CPI), which showed renewed growth in these two areas. The PCE Price Index and the CPI also confirmed that food inflation remains elevated at around 11 percent.

“Disinflation is over,” said Peter Schiff, the chief economist and global strategist at Euro Pacific Capital, adding that the Federal Reserve will unsuccessfully bring inflation down, but it will “succeed in bringing down the economy, financial markets, and creating a financial and sovereign debt crisis worse than 2008.”

The U.S. financial markets were not pleased with the statistics, as the leading benchmark indexes tumbled more than 1 percent to end the holiday-shortened trading week.

The Treasury market was up across the board, with the benchmark 10-year yield adding about 8 basis points to around 3.96 percent.

The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, also rallied to a seven-week high of 105.00.

How Policymakers Are Reacting

Public policymakers are concerned that high inflation might persist and continue to decelerate at a slower pace.

Philip Jefferson, an economist and Fed Governor, told the U.S. Monetary Policy Forum in New York City on Friday that these “inflationary forces” inflicting pain on the U.S. economy spotlight “a complex mixture of temporary and more long-lasting elements that defy simple, parsimonious explanation.”

“The ongoing imbalance between the supply and demand for labor, combined with the large share of labor costs in the services sector, suggests that high inflation may come down only slowly,” he said.

Speaking in an interview with CNBC before the latest print, Cleveland Federal Reserve Bank President Loretta Mester said her forecasts in the December Survey of Economic Projections (SEP) have not changed. She still believes that the benchmark federal funds rate needs to go above 5 percent and stay there until there is a sustainable downward inflation trend.

“I had my funds rate a little bit above the median in that projection, and I haven’t really seen much change in my outlook for the economy since that time,” she said. “So I see that we’re going to have to bring interest rates above 5 percent. I do think we need to be somewhat above 5 percent and hold there for a time in order to get inflation on that sustainable downward path.”

The dot-plot revealed that the median policy rate was seen rising to 5.1 percent this year and then declining to 4.1 percent in 2024 and 3.1 percent in 2025.

The higher-than-expected PCE Price Index might support St. Louis Fed Bank President James Bullard’s case of hiking rates to nearly 5.4 percent as quickly as possible to bring down inflation.

While his colleagues might be reluctant to be more hawkish on monetary policy, Bullard thinks now is the time for the central bank to be more aggressive in its quantitative tightening campaign, especially as the national economy proves to be more resilient than what officials had projected.

“I think we are going to have to get north of 5 percent. Right now I’m still at 5.375 percent,” Bullard told CNBC on Wednesday. “We’ve got a little ways to go here and I’ve argued that ‘hey, let’s get to where we want to go’ and then from there, we can see how the data come in. Let’s hope that we get disinflation in 2023.”

Investors are still penciling in a quarter-point rate hike at next month’s Federal Open Market Committee (FOMC) policy meeting. But the odds of a 50-basis-point boost have steadily risen, according to the CME FedWatch Tool.

Despite the disappointing inflation numbers, the White House was ebullient over the data.

“Today’s report shows we have made progress on inflation, but we have more work to do,” President Joe Biden said in a statement. “As I’ve long said, there may be setbacks along the way, but we face global economic challenges from a position of strength. And I will not allow my Republican friends in Congress to undermine that strength.”

The Council of Economic Advisers (CEA) for the Biden administration urged everyone on Twitter “not to focus too much on one report.”