The Federal Reserve might decrease interest rates in June after US prices increased in January, although the annual gain was the lowest in over three years.

The 12-month PCE inflation rate rose 2.4% before January. This is the lowest year-over-year increase since February 2021, after 2.6% in December. Economists expected 0.3% monthly PCE price index growth and 2.4% year-on-year. Consumer and producer prices rose last month, mostly due to firms boosting prices at the start of the year.

Experts Advise Caution

The government's technique for eliminating seasonal changes from data may not entirely explain the beginning-of-year price spikes, and most experts do not anticipate them to last beyond February.

S&P Global Ratings Chief US Economist Satyam Panday advised caution, saying, "It will be prudent to hold back on passing any strong judgment till February data comes out next month." He wondered whether January's increase was a one-off owing to seasonal adjustment factors failing or a sign of a bigger Fed problem, as per a Reuters report.

Following a downwardly revised 0.1% gain in December, the PCE price index rose 0.4% last month, excluding volatile food and energy components.

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The core PCE price index rose 2.8% year-on-year in January, the weakest gain since March 2021, after rising 2.9% in December. The Fed monitors the PCE price measures for its 2% inflation target, with monthly inflation readings of 0.2% required overtime to bring inflation back to the target.

Interest Rate Cuts Possible in June

Recent government data revealed slight upward revisions to inflation in the fourth quarter, leading financial markets to adjust expectations for a rate cut to June from May. 

Fed officials signaled a lack of urgency to start lowering borrowing costs, having raised the policy rate by 525 basis points to the current 5.25%-5.50% range since March 2022.

A tight labor market continues to support consumer spending despite a 0.2% decrease from December's 0.7% increase, which keeps wage gains high.

A separate Labor Department report on Thursday (Feb. 27) indicated a rise of 13,000 in initial claims for state unemployment benefits to a seasonally adjusted 215,000 for the week ended Feb. 24, slightly exceeding the forecast of 210,000.

Claims, however, continue to hover at historically low levels despite high-profile layoffs at the start of the year. Meanwhile, Thursday's figures from the Bureau of Economic Analysis are distinct from the US Consumer Price Index, which reported a 3.1% rise in the year to January, according to the Financial Times.

Bill Diviney, Senior US Economist at Dutch bank ABN AMRO, noted that leading indicators for inflation, such as rent and used car prices, "suggest disinflation will continue over the coming months." He anticipates PCE inflation to be broadly back at the Fed's target by June, expecting the Fed to initiate rate cuts at that time.

VC Post earlier reported that oil prices extended their decline as the dollar surged amid investor predictions of stronger-than-expected inflation, postponing potential US interest rate cuts that could stimulate global gasoline consumption.

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