In December, U.S. prices experienced a moderate rise, maintaining the annual inflation increase below 3% for the third consecutive month. This development is seen as a potential signal for the Federal Reserve to contemplate interest rate cuts in the upcoming year.
The Commerce Department’s Bureau of Economic Analysis reported a 0.2% increase in the Personal Consumption Expenditures (PCE) price index for the month, rebounding from a 0.1% drop in November. The year-on-year data reveals a 2.6% increase, aligning with the unrevised gain observed in November.
Economists, as per Reuters’ poll, had anticipated a 0.2% monthly climb in the PCE price index with a 2.6% year-on-year rise, a forecast accurately mirrored in the official report.
When excluding the volatile food and energy components, the core PCE price index saw a 0.2% gain in December, following a 0.1% rise in November. The year-on-year core PCE price index increase was 2.9%, marking the smallest gain since March 2021 and a decrease from November’s 3.2%.
The Federal Reserve closely monitors the PCE price measures for its 2% inflation target. Analysts emphasize that sustained monthly inflation readings of 0.2% are crucial to bring inflation back to target levels.
Recent government reports indicated that core PCE inflation rose at a 2.0% annualized rate in the fourth quarter, consistent with the July-September quarter. While financial markets have tempered expectations of a March rate cut to below 50%, there is still anticipation for a reduction in borrowing costs by June.
Despite a series of rate hikes since March 2022, the U.S. central bank is expected to maintain its policy rate within the current 5.25%-5.50% range at the upcoming meeting next week.
The easing inflation scenario is contributing to increased household purchasing power, propelling consumer spending and overall economic growth. Consumer spending, a significant driver of U.S. economic activity, rose by 0.7% in December, following a 0.4% increase in November. Adjusted for inflation, overall consumer spending experienced a 0.5% uptick in December, setting a positive trajectory for the first quarter.
This data is part of the advance gross domestic product report for the fourth quarter, revealing a robust 2.8% rate of consumer spending growth, a major contributor to the overall 3.3% economic growth pace during the period.