WASHINGTON -- The Federal Reserve's preferred inflation gauge rose last month at its fastest pace since June, an alarming sign that price pressures remain entrenched in the U.S. economy and could lead the Fed to keep raising interest rates well into this year.
Friday's report from the Commerce Department showed that consumer prices rose 0.6% from December to January, up sharply from a 0.2% increase from November to December. On a year-over-year basis, prices rose 5.4%, up from a 5.3% annual increase in December.
"In a nutshell, it means the job is not done -- in fact, it is far from done, because inflation is much too high," said Gennadiy Goldberg, a rates analyst at TD Securities. "The economy is still strong, and consumers are still spending money."
Excluding volatile food and energy prices, so-called core inflation rose 0.6% from December, up from a 0.4% rise the previous month. And compared with a year earlier, core inflation was up 4.7% in January, versus a 4.6% year-over-year uptick in December.
The report also showed that consumer spending rose 1.8% last month from December after falling the previous month.
Goldberg said Friday's report was sure to spur speculation in markets that the Fed might speed up its rate increases, moving by a half-point rather than a quarter-point in March. Indeed, investors increased their bets for a larger half-point increase in March in the wake of the report, though expectations still tilted toward a quarter-point increase.
Friday's spending report sent U.S. stocks lower. The Dow Jones Industrial Average fell as much as 510 points during the day before closing down 336 points, or 1%. The S&P 500 fell 1%.
A downturn in the market this month has come alongside a reassessment among investors about what the Federal Reserve will have to do to lower inflation, and the damage that might inflict on companies, consumers and the economy.
"I think the market reaction we are seeing very clearly suggests investors think that the Fed has more work to do," said Liz Ann Sonders, chief investment strategist at Charles Schwab.
January's price data exceeded forecasters' expectations, confounding hopes that inflation was steadily decelerating and that the Fed could relent on its campaign of rate increases. It follows other recent data that also suggested that the economy remains gripped by inflation despite the Fed's strenuous efforts to tame it.
Last week, the government issued a separate inflation measure -- the consumer price index -- which showed that prices surged 0.5% from December to January, much more than the previous month's 0.1% rise. Measured year over year, consumer prices climbed 6.4% in January. That was well below a recent peak of 9.1% in June but still far above the Fed's 2% inflation target.
Since March of last year, the Fed has attacked inflation by raising its key interest rate eight times. Yet despite the resulting higher borrowing costs for individuals and businesses, the job market remains surprisingly robust. That is actually a worrisome sign for the Fed because strong demand for workers tends to fuel wage growth and overall inflation. Employers added a sizzling 517,000 jobs in January, and the unemployment rate fell to 3.4%, its lowest point since 1969.
"Reaccelerating price pressures, coupled with a still-strong labor market that is restoring incomes and is supporting demand, will keep the Fed on track to hike rates further over coming meetings," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
The Fed is thought to monitor the inflation gauge that was issued Friday -- the personal consumption expenditures price index -- even more closely than it does the better-known CPI.
Typically, the PCE index shows a lower inflation level than CPI. In part, that's because rents, which have soared, carry twice the weight in the CPI than they do in the PCE.
The PCE price index also seeks to account for changes in how people shop when inflation jumps. As a result, it can capture emerging trends -- when, for example, consumers shift away from pricey national brands in favor of less expensive store brands.
The consumer price index showed a worrisome rise from December to January: It jumped 0.5% -- five times the November-to-December increase.
Likewise, the government's measure of wholesale inflation, which shows price increases before they hit consumers, accelerated 0.7% from December to January after having dropped 0.2% from November to December.
"The inflation readings are still not where we need them to be," Cleveland Fed President Loretta Mester told Bloomberg News in an interview Friday in New York.
Fed officials will be parsing an array of data on jobs, spending and inflation before their next meeting on March 21-22.
They may also take a signal from recent earnings calls, which have suggested that the economy is beginning to lose some of its heat, though it is still not fully back to normal. Corporate profit margins had expanded drastically, but could begin to stall out as firms find it increasingly difficult to charge ever-higher prices.
In 2022, "we observed a resilient customer who is less price sensitive than we would have expected in the face of persistent inflation," Ted Decker, Home Depot's chief executive, said on a call with analysts this week. But "we noted some deceleration in certain products and categories, which was more pronounced in the fourth quarter."
Information for this article was contributed by Paul Wiseman of The Associated Press; by Jeanna Smialek, Ben Casselman and Joe Rennison of The New York Times; and by Jonnelle Marte and Craig Torres of Bloomberg News (WPNS).
Customers walk around the Walmart Supercenter, Thursday, Feb. 9, 2023, in North Bergen, N.J. On Friday, the Commerce Department issues its January report on consumer spending. (AP Photo/Eduardo Munoz Alvarez)