By Howard Schneider

WASHINGTON (Reuters] – Inflation’s preferred measure by the Federal Reserve rose in January. It is likely that this confirms the central bank’s intention to continue raising interest rates over the next year, even though policymakers begin to assess the impact of Russia’s-Ukraine conflict.

Through January, the personal consumption expenditures price index grew at 6.1% annually. This is its highest level since 1982. It also exceeds the Fed’s target of 2% inflation for the U.S. Economy.

It’s the 14th month in a row that that measure of the annual rate of inflation has not retreated – a run not seen since the 1970s and a blow to arguments commonly heard at the Fed last year https://graphics.reuters.com/USA-FED/INFLATION/zdpxoqkrkvx/index.html that rising prices would prove “transitory” and disappear as the economy reopened – and could keep alive arguments for larger and faster rate hikes. The index’s month-tomonth variation did not suggest that there was a moderated trend.

(GRAPHIC: The COVID inflation surge The COVID inflation surge – https://graphics.reuters.com/USA-FED/INFLATION/akvezawxopr/chart.png)

Fed officials are expected to raise interest rates on March 15-16. But, they have debated whether the Fed should increase its initial rate by a standard quarter-point or an even larger half-point to signal that it is serious about controlling inflation.

Christopher Waller, the Fed Governor, said that Thursday’s PCE inflation data should be watched. He stated that if it indicates “the economy continues to run exceedingly hot”, a case could be made for a 50 basis-point increase in March.

The data seem to be hotter and hotter for now: From September, the PCE Index has been increasing steadily at 4.4% to 6.1%. It has either risen in increments or maintained the previous month’s level in every report since November 2020. Consumer spending exceeded all expectations, and there were no expected impacts due to the Omicron coronavirus strain’s rapid spread.

Fed officials now seek to revive a sense of optimism and reopen the economy in order for growth.

Futures traders who trade on the expectation of Fed policy are less likely to expect a 50% increase in their chances of trading.

However, the PCE report still points in the wrong direction to Fed officials who want to keep inflation under control.

Karim Baasta, III Capital’s Chief Economist said that while the chances of a move at 50pp have diminished, it is still likely to happen.” Hot would be an inflation of 6%.

There are many factors that could temper the Fed’s desire to move more quickly, including the impact of Russia’s invasion and subsequent economic downturn. This could drive up prices for many reasons, but it also could pose risks to the global economy and rattle the financial markets. It could cause Fed to be less likely to increase rates faster than it otherwise would.

This analysis began with incursions of less than 48-hours old.

Roberto Perli (Piper Sandler macro analysts) and Benson Durham, Piper Sandler macro analysts wrote: “In theory the war has two contradicting effects on Fed policy. It could stoke inflation…and it could slow down economic growth.” “The Fed is more worried about the latter than it is the former… The war will not slow liftoff… But, it might result in less rate hikes than the market pricing.