Key inflation gauge cools further, paving way for smaller Fed rate hike

THE Federal Reserve’s preferred inflation measures eased in December to the slowest annual paces in over a year while consumer spending fell, helping pave the way for policymakers to further scale back the pace of interest-rate hikes.

The personal consumption expenditures core price index, which excludes food and energy, rose 4.4 per cent in December from a year earlier, Commerce Department data showed on Friday (Jan 27). The overall gauge climbed 5 per cent year-over-year, still well above the Fed’s 2 per cent goal but both were the slowest paces since late 2021.

From a month earlier, the core gauge – which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading – was up 0.3 per cent. The overall PCE price index increased 0.1 per cent. Both were driven almost entirely by services as goods disinflation continued.

Personal spending, adjusted for changes in prices, dropped 0.3 per cent in December. Inflation-adjusted outlays for merchandise fell 0.9 per cent, while spending on services stagnated, the first month without an increase since January 2022.

The median estimates in a Bloomberg survey of economists were for a 0.3 per cent advance in the core PCE price index and for no change in the overall measure on a monthly basis. Stock futures pared losses after the report while Treasury yields retreated slightly.

The figures added to mounting evidence that the worst bout of inflation in a generation has passed as the Fed’s aggressive tightening campaign works its way through the economy. Officials are widely expected to once again slow the pace of rate hikes, to a quarter point next week, and will discuss how much higher they need to go to ensure prices are cooling for good.

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Policymakers are adamant that their work isn’t yet done, as a tight labour market threatens to keep upward pressure on wages and prices. They also point to price growth in services excluding energy and housing, which ticked up slightly to 0.32 per cent last month, according to Bloomberg calculations.

The Fed’s hawkish stance has many economists worried the central bank will go too far, assigning a 65 per cent chance of a recession over the next year. Several officials still maintain that a soft landing is possible, a scenario in which inflation cools without a surge in unemployment.

The data showed that consumers lost momentum at the end of the year, weighed down by high prices and borrowing costs. Government data out on Thursday showed gross domestic product rose at a stronger-than-expected 2.9 per cent pace in the fourth quarter, but measures of underlying demand like consumer spending and business investment were relatively weak.

Americans, whose wages have lagged inflation throughout the pandemic, have been relying on credit cards and tapping into savings to support purchases. The saving rate rose to 3.4 per cent in December, the biggest monthly increase since July 2021, the Commerce Department report showed.

The report showed a pullback in discretionary spending, particularly on categories like restaurants and hotel stays. On the goods side, purchases on apparel and footwear also dropped.

Personal income, unadjusted for inflation, as well as real disposable income, climbed 0.2 per cent last month. Wages and salaries, unadjusted for prices, advanced 0.3 per cent from November.

The Fed will get more data on the labour market next week, including the fourth-quarter employment cost index – a broad gauge of wages and benefits – as well as December job openings, before the conclusion of its two-day meeting on Feb 1. The January payrolls report will be released on Feb 3. BLOOMBERG