Dow falls 400 points after Fed’s favorite inflation gauge runs hotter than expected

What’s driving markets

The personal consumption expenditure, or PCE, price index showed the cost of U.S. goods and services jumped 0.6% in January, its biggest rise since last summer and another sign that stubbornly high inflation is taking its time to return to low prepandemic levels.

The annual increase in prices rose to 5.4% from 5.3% in December — the first uptick in seven months. The PCE index touched a 40-year high of 7% last June.

The more closely followed core index, which is the Fed’s preferred inflation measure, also rose 0.6% last month. Analysts has forecast a 0.5% gain. The increase in the core rate of inflation in the past 12 months moved up to 4.7% from 4.6.%.

Meanwhile, an index of consumer sentiment rose in early February to a 13-month high of 67. The final reading in February was up from a preliminary 66.4 and from 64.9 in January, the University of Michigan said. 

Such data was seen cementing expectations the Federal Reserve will continue lifting its key interest rate above 5% in its effort to bring down inflation.

“Reaccelerating price pressures coupled with a still-strong labor market that is restoring incomes and is supporting demand will keep the Fed on track to hike rates further over coming meetings, to a peak rate that could be higher than officials expected in December,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.

“This morning’s data suggest the economy is very resilient and might prompt more bets that the Fed will need to take rates closer to 6.00%,” Edward Moya, analyst at Oanda, said in a note.

In other economic data, sales of new single-family houses in the U.S. soared 7.2% in January to a seasonally adjusted annual rate of 670,000, hitting its highest level in 10 months, according to the Commerce Department.

Investors are also hearing from a basketball team-sized list of Fed speakers Friday, including Fed Governors Philip Jefferson and Christopher Waller, and regional presidents Loretta Mester, James Bullard and Susan Collins.

The strong job market may make it hard for the U.S. central bank to bring down inflation, Jefferson said on Friday.

“The ongoing imbalance between the supply and demand for labor, combined with
the large share of labor costs in the services sector, suggests that high inflation may come down only slowly,” Jefferson said Friday in a speech at a University of Chicago Booth School of Business conference in New York.

In an interview with CNBC ahead of the data, Mester said she wouldn’t “prejudge” whether the Fed lift interest rates by half a percentage point at its March meeting after its Feb. 1 quarter-point hike. Mester last week said she had called for a half-point hike at that earlier meeting.

Overseas, incoming Bank of Japan Gov. Kazuo Ueda said it would be appropriate to continue easing — for now. “Our colleagues in Tokyo judged that Ueda’s key views on economic conditions, the inflation outlook, the current monetary policy stance and transmission mechanism all differed little from those of [current Bank of Japan Gov. Haruhiko] Kuroda. In order to avoid generating unwelcome market volatility, of course, that was probably Ueda’s intention,” said economists at Daiwa Europe in a note to clients.

Companies in focus

• Carvana Co.
  CVNA,
  -19.00%
  said it plans to complete a $1 billion reduction in operating costs by the second quarter of 2023 as the online car-sales company seeks to right itself without resorting to layoffs, after it snapped a streak of winning years in 2022. Shares fell 14%.

• Shares of Dow component Boeing Co.
  BA,
  -4.55%
  fell 4.5% as the airplane maker halted deliveries of the 787 Dreamliner. The Federal Aviation Administration said deliveries are temporarily halted as Boeing is conducting additional analysis on a fuselage component.

• Shares of Open Lending Corp
  LPRO,
  -29.83%.
  sank 36% to an all-time low Friday after the company swung to an unexpected loss in the fourth quarter.

• Turning Point Brands Inc. 
  TPB,
  +5.39%
  stock rose 5% Friday after the maker of Zig-Zag rolling papers beat its revenue and earnings targets. 

Movers & Shakers: Boeing stock slips after deliveries of 787s halted; Beyond Meat shares rally after plant-food maker’s results

—Steve Goldstein contributed reporting to this article