The Fed's favorite price gauge shows sticky inflation - and little chance of improvement soon

By Jeffry Bartash

The core PCE price index has risen 3.1% in the past year. The Iran conflict will push it even higher.

A customer shops in a grocery store in Miami, Florida. Inflation has changed Americans' buying habits.

Federal Reserve officials have grown more worried about sticky inflation in the past few months - and the central bank's favorite price gauge shows why. Prices rose briskly in January and are on track to increase sharply in February.

The personal consumption expenditures price index rose 0.3% in January, the government Friday, in a report delayed a few weeks by recent federal shutdowns. The increase matched the Wall Street forecast.

The 12-month rate of inflation, as measured by the PCE, edged a touch lower to 2.8% from 2.9%.

The Fed is aiming to reduce the rate of inflation to 2% or less a year, but it's still far from its goal.

The core rate of inflation, which omits food and energy, rose by 0.4%. The core rate strips out volatile food and energy prices and is seen as the best predictor of future inflation.

The core rate rose 3.1% in the 12 months ended in January, up from 3.0% in the prior month. It's the highest rate in almost two years and decidedly not what the Fed wanted to see.

Similar increases in the PCE indexes are expected in February as well - and that was before the surge in oil prices tied to the conflict with Iran.

"The Fed will also be concerned about heat in core PCE prices ahead of the war," said economist Katherine Judge of CIBC Capital Markets.

Higher oil prices could boost inflation in March and beyond, depending on how long the conflict lasts. As a result, the Fed might refrain from cutting U.S. interest rates again until oil prices subside.

A darker January PCE pretty much negates a more positive report on the consumer-price index in February. The CPI shows inflation running closer to 2.5%.

Economists say the CPI probably understates the true rate of inflation owing to the government shutdown last fall. The Bureau of Labor Statistics was unable to collect all the price data it needed for more than 40 days, forcing the agency to make some guesstimates.

In any case, the rate of inflation is all but certain to surge in March due to the spike in oil prices.

Consumer spending, meanwhile, was just so-so in January. In the same report, the government said spending rose 0.4% in the first month of the year.

Winter storm Fern slammed the U.S. in late January and left much of the country a frozen mess. That hurt spending.

The good news is that spending appears to have recovered since then, credit card and other data show. Higher tax refunds could also boost spending in February.

Incomes rose 0.3% in January.

Market reaction: The Dow Jones Industrial Average and S&P 500 opened higher on Friday, but stocks are still under pressure from the conflict with Iran.

-Jeffry Bartash

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