A key inflation gauge released on Friday showed price increases slowing as 2023 draws to a close.
As an important indicator of the Federal Reserve, the U.S. Department of Commerce’s personal consumption expenditures price index increased by 0.2% quarterly and 2.9% annually (excluding food and energy) in December. Economists surveyed by Dow Jones had expected increases of 0.2% and 3% respectively.
On a monthly basis, core inflation rose from 0.1% in November. However, annual growth fell from 3.2%. The 12-month interest rate is the lowest since March 2021.
Overall inflation, which includes volatile food and energy costs, also rose 0.2% this month, holding steady at an annual rate of 2.6%.
The news is further evidence that inflation, while still high, is continuing to fall, potentially giving the Federal Reserve the green light to begin cutting interest rates later this year. The central bank targets 2% as a healthy annual inflation rate.
The market paid little attention to the data, with stock index futures showing only small changes at the opening and Treasury yields mostly lower.
“Inflation dynamics within the indicators the Fed uses to set policy strongly suggest the central bank will hit its inflation target in the near term,” said Joseph Brusuelas, chief economist at RSM. “This would set the stage for a policy shift.” conditions and begin a multi-year campaign to lower policy rates to a range of 2.5% to 3%.”
The Federal Reserve’s benchmark overnight interest rate currently targets a range of 5.25%-5.5%.
As inflation edged closer to the Federal Reserve’s target, consumer spending grew 0.7%, stronger than expectations of 0.5%. Personal income growth edged down to 0.3%, in line with forecasts.
Data shows consumers are dipping into their savings to cover expenses. The personal savings rate fell to 3.7% this month, down from 4.1% in November.
In the inflation data, prices for goods fell 0.2%, while prices for services rose 0.3%, reversing a trend that started when inflation began to surge. As the pandemic forces people to stay home more, demand for goods has surged, exacerbating supply chain issues and exacerbating price increases.
Food prices rose 0.1% this month, while energy goods and services prices rose 0.3%. Prices of more durable durable goods such as appliances, computers and cars fell 0.4%.
Another report on Thursday showed that gross domestic product (GDP) grew by 3.3% in the fourth quarter, much faster than expected. The latest round of data showed that the economy expanded and inflation returned to at least the level expected by the Federal Reserve. 2% annual target.
“It’s hard to say which is more striking: GDP growth accelerating last year after the Fed’s most aggressive tightening in decades, or core inflation still falling back to the 2% annualized target in the second half of this year, Capital Investments Andrew Hunter, deputy chief U.S. economist at Capital Economics, wrote.
“Either way, it’s time for Fed officials to win and start reducing the level of policy restrictions as quickly as possible,” he added.
While the public pays closer attention to the Labor Department’s Consumer Price Index, Fed policymakers prefer PCE because it adjusts for changes in what consumers actually buy, while the CPI measures market prices. .
Inflation has been a vexing issue since the early days of the COVID-19 pandemic, when price increases soared to levels not seen since the early 1980s. The Fed initially expected the acceleration to be temporary and subsequently adopted a series of rate hikes, taking its benchmark interest rate to its highest level in 22 years.
Now, with inflation cooling, the Fed is widely expected to begin easing its tightening policy. As of Friday morning, futures traders were pricing in about a 53% chance that the Fed would cut interest rates for the first time this cycle in March, according to CME Group data. Pricing this year is expected to drop by six percentage points.
Don’t miss these stories from CNBC PRO:
