Inflation sped back up after a period of slowing at the end of last year, dealing a blow to the Federal Reserve, which will likely continue to raise interest rates this year in its quest to tame inflation.  

The Personal Consumption Expenditures price index, the Fed’s preferred measure of inflation, jumped 0.6% last month, up from 0.2% in November and December, figures from the U.S. Bureau of Economic Analysis showed on Friday. The price measure increased 5.4% from last January, an unexpected increase from 5.3% last month. 

Excluding food and energy prices, which fluctuate and are unpredictable, prices still climbed by 4.7 percent in the year through last month. 

The resurgence of inflation in January – after a slowdown in late 2022 – complicates the Fed’s effort to bring down inflation to its goal of 2 percent annual price increases. Coupled with continued strong job growth and increased consumer spending, the Fed’s challenge of steadying the economy appears ever more difficult and increases the odds the Fed will continue to raise interest rates more than previously expected. 

When the Fed raises interest rates, borrowing becomes more costly, which in theory should discourage consumers from making larger purchases like purchasing a home or car, which slows down the economy, lowering demand and bringing prices down. Friday’s data, however, suggests that hasn’t happened so far.

Overall personal spending rose 1.8% in January after falling 0.1% and 0.2% in the previous two months, respectively. 

The economy's current strength at the moment leaves demand too high to ease inflation, which encourages the Fed to raise rates.

In the wake of the latest data, Chief US Economist at NatWest Markets Securities Inc, Kevin Cummins, now expects the Fed to raise interest rates half a point, up from a quarter point prediction, in their next meeting on March 21-22 in an attempt to stifle the still-heating economy. 

The Fed has raised interest rates to 4.5% from near zero at the beginning of last year, the fastest pace of increases since the 1980s. But the Fed is trying to bring inflation under control without raising rates so high that they cause a recession.

Still, Cummins doesn’t expect the latest inflation data to cause the Fed to raise rates enough to set off a recession this year. 

It does suggest that talks about a recession right now are probably still premature,” he said.  “We do have a recession in our forecast, but it's not gonna happen this year. So I guess it's kind of a mixed bag.”

Still, the latest data showed other worrying signs for the Fed in its bid to slow down the economy. 

High consumer spending indicates a strong economy but adds to inflation since demand increases when people are willing to spend. This is troublesome for the Fed, which prefers to slow down the economy, requiring consumers to spend less to bring inflation down. 

The consumer spending figures show that consumers spent more on goods and services, which included travel and eating at restaurants. 

Shannon Seery, an economist at Wells Fargo, expects consumers to continue spending primarily on services since she said boosts in consumer spending on durable goods are less likely to be sustained. 

“If you strip through the volatility, consumer spending has continued to grow at a relatively gradual and strong pace,” she said. “So I think, iit really just emphasizes that the consumer isn't really yet showing signs of a significant slowdown.”