The Fed’s favoured measure of inflation accelerated in January with markets now fully pricing 25bp moves in March, May and June.

The core PCE price index rose 0.6% month-on-month versus expectations of a 0.4% print and is also above the 0.4% increase reported by the core CPI report.

There were upside revisions too, which means the year-on-year rate has ticked up to 4.7% from 4.6%, above the 4.3% rate expected.

This will ensure the Fed hikes continue with 25bp moves in March, May and June fully priced by markets, althought a potential 50bp move at the March Federal Open Market Committee meeting can’t be completely discounted.

Source: Macrobond, ING

Meanwhile, personal incomes didn’t rise quite as much as expected, up 0.6% MoM. The consensus was for a 1% gain because of the annual uprating of social security benefits by 9%, but there was a 2.7% MoM drop in farm income while “other benefits” fell 15.5%.

Real personal spending rose 1.1% MoM as expected. There can be weaker prints in February and March, but consumer spending is still likely to grow in the 3.5-4% annualised range in the first quarter of this year.

Household finances are under pressure though

The combination of decent income growth, rising spending and robust inflation means March and May rate hikes are very likely and we have to accept that a further move in June is more likely than not.

Our caution centres on the combination of squeezed real incomes, rising interest rates and tightening lending conditions all happening at the same time.

Household saving ratios are now well below pre-pandemic levels while the proportion of income spent on servicing the debts on consumer loans is at the highest since 2009 (chart above measures them as % of household disposable income).

This hints at financial pressures on the household sector and this will increasingly bite as we go through the year. It will only get worse if those lay-off announcements keep coming, which could lead to the economy to slow sharply in coming quarters, opening the door for a path to lower interest rates from the fourth quarter.

Source: Macrobond, ING

Based on a story form ING Bank N.V. as the copyright owner