Inflation Gauge Rises Before Iran War Impact

An inflation gauge closely monitored by the Federal Reserve rose 2.8% in January compared with a year earlier, slightly below December’s increase but still elevated before the Iran war caused spikes in oil and gas costs.

The Commerce Department reported that prices for goods excluding volatile food and energy categories — which the Fed pays closer attention to — rose 3.1%, up from 3% in the prior month, marking the highest increase in nearly two years. On a monthly basis, prices rose 0.3% while core prices jumped 0.4% for the second straight month.

The data has since been overtaken by the war with Iran, which began on February 28 and has shut down the Strait of Hormuz, cutting off one-fifth of the world’s oil supply. Oil prices have soared more than 40% since the war began, causing gas prices to jump from just under $3 a gallon to $3.60 according to AAA.

The inflation-fighters at the Fed have kept their key interest rate elevated to slow borrowing, spending, and growth in an effort to cool inflation further. Fed policymakers meet next week and are widely expected to keep their rate unchanged given that the conflict in the Middle East will raise inflation, at least in the short run.

The report also showed that consumers lifted their spending at a solid 0.4% pace in January, matching December’s rise and indicating steady economic growth. Consumer spending powers about two-thirds of the economy. Incomes rose by 0.4%, with after-tax incomes jumping 0.9%, fueled by an increase in Social Security benefit payments due to a cost-of-living adjustment.

The personal consumption expenditures price index, included in Friday’s report, is running hotter than the consumer price index (CPI) because it puts much less weight on rental costs, which have been cooling steadily in recent months. The PCE index typically runs below the CPI but has pulled ahead of it just in the past few months.