Annual inflation in the United States decreased to 2.5% in January, down from 2.6% in December, according to the US Bureau of Economic Analysis. The core Personal Consumption Expenditures (PCE) Price Index rose by 2.6% on a yearly basis, decreasing from 2.9% in the previous month.

Monthly, both the PCE and core PCE Price Index saw a rise of 0.3%. Personal Income grew by 0.9% while Personal Spending fell by 0.2%.

At the time of reporting, the US Dollar Index rose by 0.04% to 107.33. The USD showed the strongest performance against the New Zealand Dollar.

Monthly changes in currency values indicated various fluctuations, with the USD experiencing a 2.46% increase against the NZD, while different currencies saw varied performances against each other.

Anticipated readings had projected core PCE to rise 0.3% MoM and 2.6% YoY in January, while annual PCE inflation was expected to drop to 2.5%. Central bank policy during March and May is anticipated to remain unchanged.

Higher inflation typically leads central banks to raise interest rates, impacting currency values, while lower inflation can have the opposite effect.

These figures give us a clear indication of where inflation and currency movements are heading. The dip in annual inflation to 2.5% and the decline in core PCE to 2.6% confirm what markets were expecting. A monthly rise of 0.3% for both measures, while not alarming, suggests pressures haven’t evaporated completely.

Personal Income climbing 0.9% sounds encouraging, but the 0.2% drop in Personal Spending throws up some questions. Are consumers pulling back because they feel uncertain, or is this just a temporary adjustment? It’s too early to say, but this will be something to watch, especially with wage growth in focus.

As we saw, the dollar edged up ever so slightly, but its strength over the past month was most evident against the New Zealand Dollar, with a 2.46% gain. That tells us risk sentiment may be shifting, or the Reserve Bank of New Zealand’s own policy stance may have played a part. Elsewhere, currency movements varied, reflecting local factors rather than a single global trend.

The market had already priced in these inflation numbers, and with expectations aligning with reality, there’s little reason to think the Federal Reserve will deviate from its projected path in March or May. Central bank decisions often hinge on inflation levels—when prices rise too fast, interest rates tend to follow suit. A slowdown, on the other hand, makes room for easing later on.

In the coming weeks, volatility in currency and derivative markets will rely heavily on fresh economic data. With Personal Spending dipping and inflation cooling, we need to keep an eye on whether demand slows further or picks back up. For now, the prevailing sentiment appears to be one of cautious waiting.