ROI-US inflation isn't subsiding. It's heating up again: Mike Dolan

By Mike Dolan

LONDON, Feb 5 (Reuters) - The main reason political pressure on the Federal Reserve has not caused markets to price in deeper interest rate cuts is perhaps the simplest: U.S. inflation is just too high to justify it, and there are signs it may be picking up again.

The Fed's favored measure of inflation - core personal consumption expenditures (PCE) inflation, which excludes volatile food and energy prices - is creeping higher again, and several alternative gauges of retail prices also show some heat building as 2026 is getting underway.

Even though the December PCE report is not due out for another two weeks, Fed Chair Jerome Powell made clear last week that the central bank now assumes that core PCE inflation ran at 3% in the final month of last year.

Not only is 3% core inflation a full point above the Fed's inflation target, but it's going in the wrong direction. It would be the fastest rate in over two years, more than 40 basis points higher than it was running last April.

That's cause for a pause, no doubt.

What's more concerning are signs from January that price rises may be heating up for households and businesses alike. With economic activity facing upward pressures and business loan growth expanding, it's fair to ask whether the current Fed rate settings are bearing down on inflation at all.

According to UBS, online retail prices captured by Adobe's Digital Price Index rose in January by the most in the series' 12-year history.

Even though January typically sees higher monthly inflation than other months, price rises this year were the fastest ever seen in that survey.

On top of this, annual online price inflation of 2.9% is the fastest rate since the post-pandemic period between 2020 and 2022 - the point at which the Fed began its steep credit tightening. This metric remained negative for most of the next three years up until last summer.

With the January index's jump driven mainly by the price of electronics, computers, appliances and furniture, UBS said the increase could be a sign that last year's import tariffs are feeding through to consumers, though the bank urged caution about data volatility.

INFLATION ONLINE

How big a deal might it be more broadly that U.S. online retailers are jacking up prices so sharply to start the new year?

Somewhat surprisingly, online shopping is still a relatively small share of overall U.S. retail spending - some 16%. However, up to a third of consumers reckon they buy online and in stores.

UBS economist Alan Detmeister also points out that the online price index led a similar basket of the consumer price index both up and down during the pandemic period and thus bears close watching.

What's more, U.S. businesses are also seeing input price growth pick up pace this year.

January U.S. factory and service sector surveys from ISM show the already brisk growth in "prices paid" went up another notch last month. That raises some concern about a lagged "passthrough" of those costs to consumers.

Combine this with Fed bank surveys showing strengthening loan growth, annualized GDP growth tracking at more than 4% and a relatively stable labor market and many at the Fed are likely wondering whether further credit easing is wise at this time.

Richmond Fed boss Tom Barkin, for one, seems uncomfortable with the state of affairs and reckons the economy may now be seeing the effects of fiscal and monetary expansion hitting with a delay.

"Inflation ... still remains above our target. That's been the case since 2021," Barkin said on Tuesday. "I take this sustained miss seriously. Today's inflation numbers, regardless of the 'why,' significantly influence tomorrow's inflation."

For President Donald Trump and his administration, the whole picture may sour his election year "affordability" drive - and also call into question his call for sharply lower interest rates.

For Fed Chair nominee Kevin Warsh, it heaps pressure on what is likely to be his first policy meeting at the helm in June, especially if the long-time hawk tries to argue for the rate cuts the president has demanded. What he says in the meantime about his stance will now be particularly sensitive.

The opinions expressed here are those of the author, a columnist for Reuters.

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(by Mike Dolan; Editing by Anna Szymanski and Nia Williams)

((mike.dolan@thomsonreuters.com; +44 207 542 8488; Reuters Messaging: mike.dolan.reuters.com@thomsonreuters.net/ @))