By Paul R. La Monica

Inflation continued to moderate in January, which may give the Federal Reserve reason to lower interest rates again later this year.

But easing price pressures weren't enough to assuage shoppers, who slowed their spending last month.

The personal consumption expenditures, or PCE, price index, rose 2.5% over the past 12 months and was up 0.3% in the month of January, according to data released by the Bureau of Economic Analysis on Friday.

The year-over-year gain in the Fed's preferred measure of inflation was in line with economists' expectations and slowed from December's 2.6% annual jump. The monthly reading of 0.3% was steady from December's pace.

"The disinflation trend will be bumpy, but it's here," said Jose Rasco, chief investment officer of the Americas for HSBC Global Private Banking and Wealth Management. Rasco told Barron's that price pressures should continue to ease as the economy slows. But he is not predicting a recession anytime soon.

The so-called core PCE index, which excludes volatile food and energy price, rose 2.6% year over year, also in line with the consensus estimate. January's core reading marks a notable deceleration from December's 2.8% increase.

The PCE price index data should be welcome news for Fed officials, who are still working to bring inflation back down to their 2% target. However, the central bank is expected to keep interest rates on hold for some time because of the uncertain outlook for fiscal and trade policy. For instance, President Donald Trump's tariffs on China -- and his proposed levies on other countries -- could further fuel inflationary pressures.

Fed policymakers left rates steady at the current target range of 4.25%-4.50% at their January meeting, after lowering the benchmark rate by a cumulative percentage point in 2024. The central bank's rate-setting committee meets again March 18-19, but markets largely don't expect rates to decrease until June.

According to interest-rate futures tracked on CME FedWatch, traders are pricing in a more than 70% probability of a rate cut following the Fed's June 17-18 meeting.

"While additional rate cuts are still probably many months away, we believe this report helps to keep one or two rate cuts on the table for 2025," said Robert Ruggirello, chief investment officer with Brave Eagle Wealth Management, in a report.

Still, the toll of inflation was evident last month as Americans' spending slowed, raising concern for some economists. Consumption expenditures fell 0.2% last month from December, even as personal income rose 0.9%, BEA data showed. Americans appear to be stocking away more cash for the proverbial rainy day. The personal savings rate rose to 4.6% from 3.5% in December.

The drop in spending goes hand-in-hand with data from the past two weeks that suggest consumers are worried about rising prices and tariffs. Both the University of Michigan and Conference Board's latest surveys showed lower-than-expected consumer sentiment and confidence.

"This is the ultimate double-edged sword report: PCE came in line with expectations and is relatively good news, but personal spending came in much lower than expected and is cause for concern, because of the steep drop in consumption," said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a report.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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February 28, 2025 10:25 ET (15:25 GMT)

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