U.S. inflation is out of control again! The Federal Reserve's "preferred indicator" released tonight is not optimistic

No matter which indicator you look at, U.S. inflation is once again heading in the wrong direction. The core PCE price index for the fourth quarter increased by 2.7% year-on-year, higher than the initially reported 2.5%. The core PCE for January, to be released on Friday, is expected to increase by 2.6% year-on-year, down from 2.7%; the overall PCE for January is expected to rise by 0.3% month-on-month, up from the previous value of 0.2%. The Personal Consumption Expenditures (PCE) price index is the Federal Reserve's preferred measure of inflation.

Whether it's housing or a box of eggs, the price increases across a range of indicators have intensified again. This is largely related to the supply and demand factors and labor market pressures that led to the surge in inflation in the early days of the pandemic, while the tariffs proposed by President Trump have heightened concerns that prices will rise further.

A series of reports indicate that price pressures are rising again—from input costs to wage growth to inflation expectations—highlighting the Federal Reserve's intention to keep interest rates unchanged for the time being. The potential inflation indicators favored by policymakers may continue to rise in January.

"We expect inflation to come back. We have always believed that inflation would return in the second half of this year, but it seems that inflation pressures have already begun to increase," said Lauren Saidel-Baker, an economist at ITR Economics.

She stated that the government will introduce more policies beyond tariffs and immigration policies. "I want to be clear: there are upside risks to our inflation outlook."

Rising Input Costs

Since the outbreak of the pandemic, the costs of materials such as lumber and steel have remained high for several years and are continuing to rise. According to S&P Global, the manufacturers' input price index reached its highest level since October 2022 this month. A similar index from the Institute for Supply Management rose to its highest level since May last month.

Businesses surveyed by the Dallas Federal Reserve in February reported that the raw materials price index doubled, reaching its highest level since September 2022, when the overall inflation rate in the U.S. peaked. A food manufacturer responded that imported goods would become more expensive due to tariffs, and the higher prices would be borne by consumers.

U.S. factory input costs reach a two-year high

The food manufacturer stated, "I have more uncertainty about the future business/consumer environment than at any time in my 40-year career."

Grocery prices have come into focus again, primarily due to the most severe avian influenza outbreak in U.S. history, which has driven egg prices to record highs. The continued rise in prices in areas such as food, as well as other major expenses like housing, healthcare, and auto insurance, is hindering overall inflation progress, despite significant declines in the prices of other items like furniture and appliances.

Inflation Expectations

When consumers expect prices to rise, it becomes easier for prices to increase. Multiple surveys show that as Trump pushes tariffs, consumers and businesses are most concerned about rising prices. According to data from the University of Michigan, long-term inflation expectations (looking at the next 5 to 10 years) rose to their highest level since 1995 in FebruaryExpectations for the coming year have also risen, which has dragged down the confidence index of the University of Michigan and the Conference Board.

U.S. long-term inflation expectations have surged to the highest level in nearly 30 years.

Stephanie Guichard, senior economist at the Conference Board, stated in a statement on Tuesday: “In written responses, mentions of inflation and overall prices remain high. Notably, comments on the current government and its policies dominated the responses.”

Meanwhile, some companies have begun to respond to Trump's trade policies. Steven Madden Ltd. announced on Wednesday that it would raise prices on some products this fall to cope with higher costs from tariffs on China. Kontoor Brands Inc., which produces Wrangler and Lee, is considering shifting production, raising prices, or taking other "proactive cost-reduction measures" if tariffs on Mexico take effect.

Wage Growth

Wages are often the largest expense for many companies, and this expense may be passed on to consumers. While labor shortages during the pandemic have largely eased, overall wage growth is slowing, though some indicators are worth noting.

According to data from ADP Research, wages for employed personnel rose in January for the first time in over two years. The government's monthly employment report showed that last month's average hourly wage increase was comparable to the largest increase since early 2022.

U.S. hourly wage growth in January reached the highest level since early 2022.

The Chief Financial Officer of Host Hotels & Resorts Inc. stated in a recent conference call that the company expects wages and benefits to rise more this year than last year, which will have the largest impact on profits.

The Chief Financial Officer of toy manufacturer Hasbro Inc. stated last week that labor costs are driving up manufacturing and logistics costs. “Labor issues are indeed more challenging, leading to persistently high inflation rates. I don't think the negative impact on wages will ease in the short term.”