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US inflation inched closer to the Federal Reserve’s 2 per cent target in January even as American households tightened their purses more than expected.

The Federal Reserve’s preferred measure of inflation, the core personal consumption expenditures price index (PCE), climbed 0.4 per cent in January, according to latest data published by the Commerce Department, and was up 1.9 per cent from a year ago, close to the central bank’s inflation target, after hitting 1.6 per cent in December.

Core PCE, which excludes more volatile items, rose 1.7 per cent year-on-year.

The latest uptick in inflation has bolstered the case for the Fed to raise interest rates when it meets later this month. Indeed, federal fund futures currently indicate a 68.6 per cent chance of a rate rise in March, according to CME calculations, up from 35.4 per cent the previous day. That comes as Bill Dudley, president of the New York Fed said on Tuesday that the case for policy tightening had become “a lot more compelling”. His remarks followed those from San Francisco head John Williams who noted that an increase in March is “very much on the table for serious consideration”.

Wednesday’s report also showed that personal spending cooled to 0.2 per cent in January, from 0.5 per cent the previous month. That was slower than the 0.3 per cent gain that economists had forecast. However, real personal spending, which adjusts for inflation declined 0.3 per cent, steeper than the 0.1 per cent drop that was estimated.

The slower spending came despite a 0.4 per cent rise in personal income rose in January from the previous month. That was more than the 0.3 per cent rise that economists had forecast and a quicker pace than registered in December.

Copyright The Financial Times Limited 2017. All rights reserved.
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