Fed’s Preferred Inflation Gauge Points to Rate Cuts Soon

January 27, 2024

A key inflation metric showed that the rate of price increases continued to cool as 2023 came to an end, clearing the way for the Federal Reserve to cut interest rates in the coming months.

December’s personal consumption expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge, showed that prices increased 0.2% from November and 2.6% from a year earlier, according to the Commerce Department. The annual rate held steady from November to December, while the monthly increase was an acceleration from November’s 0.1% increase.

The so-called “core” PCE, which excludes volatile components like food and energy, also increased 0.2% from the month prior and was up 2.9% on a yearly basis. That is a slowdown from November when the core PCE was up 3.2% from a year prior. December’s annual core increase was the slowest since March 2021. Using three- and six-month annualized rates, core inflation was 1.5% and 1.9%, respectively, in December.

The release adds to evidence that inflation, while still elevated, is continuing to trend lower, possibly giving the Fed a green light to start cutting interest rates later this year. The central bank targets 2% as a healthy annual inflation rate.

The Commerce Department report also showed that consumer spending increased 0.7%, stronger than the 0.5% estimate. Personal income growth edged lower to 0.3%, in line with the forecast, but was higher than the month’s inflation, which is good news for consumers.

Within the inflation numbers, prices for goods declined by 0.2% while services prices rose by 0.3%, reversing a trend when inflation began to spike. As the pandemic forced people to stay home more, demand for goods spiked, adding to supply chain problems and exacerbating price increases.

While the general public more closely follows the Labor Department’s consumer price index (CPI), Fed policymakers prefer the PCE because it adjusts for shifts in what consumers are buying, while the CPI simply measures prices in the marketplace.

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