By Jeffry Bartash, MarketWatch
Correction: An earlier version of the article misstated the decline in real or inflated-adjusted spending. The article has been updated.
WASHINGTON (MarketWatch) — The higher cost of goods such as gasoline pushed U.S. inflation in January to the highest level since 2012, offsetting rising household incomes and raising the odds of an increase in interest rates soon.
A government report that tracks consumer spending showed a modest increase of 0.2% last month, with incomes rising even faster at 0.4%. Economists polled by MarketWatch has forecast a 0.4% gain in spending.
Yet an inflation index known as PCE also jumped 0.4% in January, pushing the increase over the last 12 months to 1.9% from 1.6% in December.
That matches the highest year-over-year level since October 2012.
The PCE index is the preferred tool for the Federal Reserve to measure inflation. The rate of inflation is now close to the Fed’s 2% long-term target, and if it keeps moving higher, the central bank could raise interest rates more aggressively.
In recent trading, Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.77% had climbed more than 200 points to a new record.
The rise in inflation over the last year has largely been linked to a rebound in the cost of oil, though the price of staples such as rent and medical have also increased.
The upward trend in inflation, however, could slow soon if oil prices continue to hover in their current range of $50 to $55 a barrel as they have for the past several months.
Another PCE index that strips out food and energy has been more stable. The core PCE index, which rose 0.3% in January, has stuck to a narrow range of 1.6% to 1.7% for the past 13 months.
“Overall inflation is set to slow in the months ahead as energy prices stabilize, and gains in inflation-adjusted after-tax income and consumer spending will resume,” said Gus Faucher, deputy chief economist at PNC Financial Services.
Consumers are still spending at levels that propel the economy forward. Although they are spending more to fill up their gas tanks, they are also buying more cars and trucks and other consumer goods.
The figures on spending were weaker if adjusted for inflation, though. Real spending fell 0.3% last month to mark the biggest decline since the beginning of 2014.
The individual savings rate was little changed at 5.5%, keeping it close to the average over the past 30 years.