The largely anticipated and latest inflation data was released on Thursday, providing a mixed bag for investors, offering both signs of relief and reasons for continued caution. While the core Personal Consumption Expenditures (PCE) index, a key gauge for the Federal Reserve, cooled to its lowest annual gain since March 2021, a monthly uptick in prices raises questions about the trajectory of future interest rate hikes.

The core PCE index, which excludes volatile food and energy prices, rose 2.8% year-over-year in January, making it the slowest annual increase in nearly two years. This aligns with Wall Street expectations and offers some comfort to investors hoping for a dovish turn from the Fed.

However, a 0.4% monthly increase in core PCE, the fastest since January 2023, throws a curveball. This contradicts the trend of the previous six months, where annualized inflation had dipped below the Fed's 2% target for two consecutive periods. As a result, the six-month annualized PCE price increase now sits at 2.5%.

Market Reaction and Fed's Next Move

While the annual slowdown is good news, the monthly jump has investors on their toes, tempering their expectations. Markets, which were previously pricing in three rate cuts for 2024, may now have to adjust their bets. Additionally, the recent surge in monthly PCE could delay the first rate cut, initially anticipated in June, according to Bloomberg data.

Experts remain mixed on the implications for the Fed. Some, like Michael Pearce of Oxford Economics, believe the Fed might still consider gradual rate cuts later in the year as long as the overall trend in inflation continues to ease. Others, like Paul Ashworth of Capital Economics, argue that the monthly rise, while unexpected, doesn't significantly alter the bigger picture. They maintain that disinflation is still on track, potentially bringing core PCE close to the Fed's target by mid-2024.

Looking Ahead

The mixed data from the PCE show us just how complex and evolving this story of inflation remains. While the year-over-year slowdown is encouraging, the monthly uptick is a reminder that the road to price stability may not be straight forward. Investors should remain vigilant and closely monitor future data releases and Fed pronouncements to navigate this dynamic economic landscape.