INFLATION IS HERE

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(REUTERS/Shannon Stapleton)

Inflation is here.

On Friday the latest report on personal income and spending, which also provides the Fed's preferred core PCE inflation measure, beat expectations all around.

And the big takeaway is that core prices, which exclude the more volatile cost of food and gas, in January rose 1.7% over the same month last year, topping expectations for 1.5% and indicating that inflation pressures are starting to perk up in the economy.

The Fed's inflation target is 2%.

Earlier this month we got data showing that the consumer price index rose 2.2% over last year on a core basis, the fastest in over four years.

And so taking Friday's report together with last week's numbers, it seems that after years of disappointment with respect to meetings its inflation target, the Fed is starting to make real progress towards its 2% goal.

Recall that back in September 2015 — when the Fed was expected by some to raise interest rates but passed due to market volatility — Fed chair Janet Yellen said the Fed's credibility rested on its ability to meet its inflation target.

Much of the resistance to the Fed raising interest rates, which it eventually did in December, hinged on the fact that inflation was still running below target.

Paul Krugman, for example, last year wrote:

So the Fed should not be eager to raise rates until inflation and wage growth are at least at, and preferably above, where they were before the bottom fell out. And it certainly shouldn't be conveying the impression that 2 percent is not a target but a ceiling, which is exactly what it would do with a rate hike.

But in January we saw that wages grew 2.5% compared to the prior year and now with inflation perking up, the Federal Reserve is making indisputable progress towards its inflation goals. In other words, March 16 is now on the table for a rate hike.

average hourly earnings growth january 2016

(Business Insider/Andy Kiersz, data from BLS)

Elsewhere in Friday's report, personal income rose 0.5% in January as did personal spending, both beating expectations.

Expectations were for the report to show a 0.4% increase in income during January while spending was set to rise 0.3%.

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