The Fed’s preferred measure of inflation fell below 3% for the first time since March 2021

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The Fed’s preferred measure of inflation has moved below 3%. For the first time since March 2021, before the start of the central bank’s interest rate hike campaign.

The personal consumption expenditures (PCE) index rose 2.6% year-on-year in December, in line with last month’s reading. The “core” PCE index, which excludes volatile food and energy categories, grew 2.9%, down from 3.2% from the previous month and below the 3.0% that economists surveyed by Bloomberg had expected.

Core PCE is the measure of inflation most often mentioned by Federal Reserve Chairman Jerome Powell.

On a monthly basis, the core personal consumption expenditures index rose 0.2% in December, compared to 0.1% in November. Importantly, annual core personal consumption expenditures over the past three and six months are now below the Fed’s 2% target.

“Core PCE inflation has been running at an annual pace in line with the Fed’s 2% target for seven months now,” Andrew Hunter, deputy chief U.S. economist at Capital Economics, said in a note to clients. “This reiterates the message that there is really no ‘last mile’ of inflation deceleration still to be achieved, and that even as real economic growth remains resilient, there is plenty of room for the Fed to start cutting interest rates soon.”

The inflation data may fuel expectations that the central bank will soon begin cutting interest rates after two years of rise. During the Fed’s December press conference, Powell told YJennifer Schoenberger from ahoo Finance The Fed wants to “reduce constraints on the economy” before inflation reaches 2%.

“Ultimately, the motivation behind lowering interest rates in my view is what happens to inflation,” said Jan Hatzius, chief economist at Goldman Sachs. he told Yahoo Finance Live On January 17th. “The deflationary trend of monthly ups and downs remains largely in place.”

Going into Friday’s edition, markets had now priced in roughly a 50-50 chance of a rate cut in March. According to CME FedWatch. The Federal Reserve’s next interest rate decision is scheduled for Wednesday, January 31.

December’s PCE reading is in line with this month’s Consumer Price Index, another closely watched measure of inflation. Which also showed increases in core cooling prices. The Consumer Price Index report for December showed that core inflation reached 3.9%.

Importantly, both publications have taken on board the recent positive readings on the economy. On Thursday, fourth-quarter economic growth came in higher than expected. A day earlier, S&P Flash PMI data showed economic output Recording its highest levels in seven months In January. This comes as Consumer expenses She remained steadfast and The job market remained brilliant.

Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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