Inflation on Target: Core PCE Matches Forecast as Durable Goods Surge Defies Recession Fears

The Core Personal Consumption Expenditures Price Index, favored by the Federal Reserve as a key measure of inflation, came in line with expectations today, rising 0.3% for the month. This marks a slowdown from December’s 0.4% increase and brings the annual core inflation figure down to 3.2%. This suggests that despite some recent fluctuations, the downward trend in inflation is holding steady. Meanwhile, the broader PCE figure rose 0.4%, but personal spending only inched up 0.2%, less than anticipated. This implies that while consumers are still spending, their demand may be starting to ease under the ongoing pressure of tighter monetary policies.

Durable goods orders in January showed surprising strength, jumping 2.1%, well above the expected 0.6%. This surge was driven mainly by a sharp 18.2% increase in aircraft orders and steady machinery demand. This is notable given the global challenges with supply chains, especially those linked to tensions around the Strait of Hormuz. However, the picture isn’t entirely rosy for long-term investment: core capital goods—those excluding defense and aircraft—fell slightly by 0.3%. This dip tempers some of the optimism around corporate spending on equipment and infrastructure.

Taken together, these figures support the idea that the economy might manage a soft landing—disinflation without a manufacturing downturn. The market took this news favorably, with Treasury yields easing by a few basis points and expectations rising for a potential rate cut around June, now seen as having about a 65% chance. Still, caution remains. Analysts point to volatility in the transportation sector and ongoing energy uncertainties tied to Middle East conflicts as factors that could disrupt the Fed’s goal of bringing inflation down to 2%. The path ahead looks steady but not without its obstacles.