The Fed's preferred inflation indicator has fallen below 3% for the first time since March 2021, before the start of the central bank's interest rate hike campaign.
The personal consumption expenditure (PCE) index rose 2.6% year-on-year in December, in line with the previous month. “Core” PCE, which excludes the volatile food and energy categories, grew 2.9%, compared with 3.2% a month earlier and 3.0% expected among economists surveyed by Bloomberg.
Core PCE is the most commonly cited measure of inflation by Fed Chair Jerome Powell.
On a month-on-month basis, core PCE rose 0.2% in December compared to 0.1% in November. Importantly, annualized core PCE over the past three and six months is now below the Fed's 2 percent target.
“Core PCE inflation has been moving in line with the Fed’s 2 percent target on an annualized basis for seven months,” Andrew Hunter, U.S. deputy chief economist at Capital Economics, said in a note to clients. “This reinforces the message that the 'last mile' of inflation control no longer really needs to be achieved and that despite continued robust real economic growth, there is plenty of room for the Fed to begin cutting interest rates soon.”
The inflation data could raise expectations that the central bank will soon start cutting rates after two years of rate hikes. During the Fed's December press conference, Powell told Yahoo Finance's Jennifer Schonberger that the Fed wants to “reduce restrictions on the economy” long before inflation reaches 2%.
“Ultimately, I think the driver of rate cuts is what happens with inflation,” Jan Hatzius, chief economist at Goldman Sachs, told Yahoo Finance Live on Jan. 17. “And the disinflationary trend that runs through the monthly ups and downs is still very much intact.”
At press time on Friday, markets had now priced in about a 50-50 chance of a rate cut in March, according to the CME FedWatch tool. The Federal Reserve's next interest rate decision is scheduled for Wednesday, January 31st.
The story goes on
December's PCE reading coincides with the month's Consumer Price Index, another closely watched measure of inflation, which also showed cooling core price increases. The December CPI report showed that core inflation was 3.9%.
Importantly, both figures coincide with recent positive economic data. On Thursday, economic growth in the fourth quarter was higher than expected. A day earlier, S&P Flash PMI data showed economic output hit its highest level in seven months in January. This is because consumer spending has remained robust and the labor market has remained healthy.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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