The Fed’s preferred inflation gauge has slipped below 3% for the first time since March 2021, marking a significant shift before the central bank’s rate-hiking initiative. The Personal Consumption Expenditures (PCE) index registered a 2.6% year-over-year growth in December, aligned with the previous month. However, “Core” PCE, excluding volatile categories, dropped to 2.9%, below the expected 3.0% forecasted by economists.
Fed Chair Jerome Powell frequently references Core PCE as a crucial inflation measure. December’s month-over-month core PCE increased to 0.2%, up from November’s 0.1%. Notably, annualized core PCE for the past three and six months has fallen below the Fed’s 2% target.
Capital Economics’ deputy chief US economist, Andrew Hunter, emphasizes that Core PCE has adhered to the 2% target for seven months, suggesting little room for further disinflation. Despite resilient economic growth, Hunter notes the potential for the Fed to cut interest rates.
The data raises expectations of the Fed initiating rate cuts after two years of hikes. During the December press conference, Powell hinted at easing economic restrictions before inflation reaches 2%. Goldman Sachs’ chief economist, Jan Hatzius, underscores the persistent disinflationary trend, supporting the case for rate cuts.
Market expectations now show a 50-50 chance of a rate cut in March, according to the CME FedWatch Tool. The Federal Reserve’s upcoming decision on interest rates is scheduled for January 31.
December’s PCE reading aligns with the Consumer Price Index (CPI), indicating a cooling trend in core price increases. December’s CPI report reveals core inflation at 3.9%. These trends coincide with positive economic indicators, including higher-than-expected fourth-quarter economic growth and robust levels of economic output in January, as reported by the S&P Flash PMI. This occurs amid resilient consumer spending and a stable labor market.
