PCE, a key inflation measure, cooled in December

PCE, a key inflation measure, cooled in December

A measure of inflation The Federal Reserve’s close watch remained cool in December, the latest sign that price increases are coming under control, even as growth remains solid and the labor market remains healthy. In particularly positive news, a key indicator of price increases fell below 3 percent for the first time since the start of 2021.

The personal consumption expenditure price index rose 2.6 percent last month from a year earlier. That was in line with economists’ forecasts and matched November’s reading.

But after excluding food and fuel costs, which can rise month-on-month, the “core” price index climbed 2.9 percent through December 2022. This followed a reading of 3.2 per cent in November, and was the best since March 2021.

Fed officials are targeting 2 percent price increases, so inflation remains high today. Still it is much less than that about 7 percent peak In 2022. In their latest economic projections, central bankers predicted that inflation will Cooled by 2.4 percent by the end of the year.

As inflation moves toward the target, policymakers have been able to scale back their campaign to slow the economy. Fed officials recently raised interest rates from near zero to a range of 5.25 to 5.5 percent in early 2022. But he has kept borrowing costs steady at that level since July – barring the final rate hike he had previously predicted – and has signaled he may cut interest rates several times this year.

Officials are trying to carry out a process of gently resetting the economy, often referred to as a “soft landing”, without causing severe economic pain.

“The punchline here is that the data is still consistent with a relatively soft landing,” said Gennady Goldberg, head of U.S. rates strategy at TD Securities. Between strong growth and mild inflation, “they’re getting the best of both worlds.”

Now, investors are watching closely to see when and by how much policymakers will reduce borrowing costs.

Fed officials are walking a delicate line as they decide what to do next. Keeping rates high for too long could risk cooling the economy more than necessary. But reducing them prematurely could cause the economy to overheat again, making it harder to get inflation fully under control.

Fed policymakers will meet next week and officials are expected to leave interest rates unchanged when the meeting ends on Jan. 31. Still, the market will keep a close eye on a press conference with Fed Chairman Jerome H. Powell for any signs of what might happen. next.

Mr Powell can provide insight into how the Fed is thinking about the intersection between growth and inflation. The economy is still growing at a solid pace and unemployment is very low, which many economic models would suggest could lead to inflation rising again.

Friday’s report showed that consumption rose more than economists expected in December, for example, especially after adjusting for cool inflation.

But so far, despite the momentum, price rises have remained slow. This comes as the labor market has returned to balance, supply chain issues related to the pandemic have become clearer and rents have moved toward normal levels.

Given this, officials have focused more on real price data in recent months as they talked about the policy outlook. But when they think about policy they still keep growth in mind.

“Rapid growth is only a problem because it makes it more difficult for us to achieve our goals,” Mr. Powell said in December. “This will likely put some upward pressure on inflation. This could mean that inflation will take longer to reach 2 percent. This could mean we need to keep rates higher for longer.

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