Fed’s Preferred Inflation Gauge Drops for First Time Since 2020

A man shops at a grocery store in Houston, Texas, on Dec. 18, 2022. Brandon Bell/Getty Images

The Federal Reserve’s preferred inflation gauge slowed at a better-than-expected pace in November as price pressures continued to subside heading into 2024.

Last month, the annual personal consumption expenditure (PCE) price index eased to 2.6 percent, down from 2.9 percent in October, the lowest reading since February 2021. This also came in below the consensus estimate of 2.8 percent.

PCE also fell 0.1 percent on a month-over-month basis for the first time since April 2020, according to the Bureau of Economic Analysis (BEA).

Core PCE, which excludes the volatile energy and food components, slowed to 3.2 percent year-over-year in November, down from 3.4 percent in the previous month. Core PCE clocked in just under economists’ expectations of 3.3 percent. It also edged up just 0.1 percent monthly.

President Joe Biden called the numbers “a significant milestone” for the U.S. economy.

“A year ago, most forecasters predicted it would require a spike in joblessness and a slowdown to get inflation down. I never believed that. I never gave up on the hard work, grit, and resilience of millions of Americans,” President Biden said in a statement. “But make no mistake: while my economic plan is getting us back on track, our work is far from finished. Prices are still too high for too many Americans, and I know the strain that can put on hardworking families.”

Investors were a little bit more subdued heading into Christmas, as the leading benchmark indexes were roughly flat. The U.S. Treasury market was mixed to finish the trading week, with the benchmark 10-year yield at around 3.9 percent. The U.S. Dollar Index (DXY), a gauge of the greenback against a basket of currencies, continued slumping on Dec. 22 and tumbled below 101.50.

“The soft inflation data would have sparked a huge rally in the bond market two months ago,” said Bryce Doty, the senior portfolio manager and vice president at Sit Investment Associates, in a note shared with The Epoch Times. “The muted response today must either be because many have checked out for a long Christmas weekend or, more likely, bond investors have already extended portfolio durations so there aren’t many left to buy (i.e., everyone is already all on one side of the boat).”

A Merry Christmas for the Fed

U.S. central bank officials might turn more dovish as the six-month core PCE rose at an annualized pace of 1.9 percent, suggesting that monetary authorities could reach their 2 percent objective soon.

“Adding in the further sharp slowdown in rent inflation still in the pipeline, it’s hard to see any credible reason why the annual inflation rate won’t also return to the 2% target over the coming months,” wrote Andrew Hunter, the deputy chief U.S. economist at Capital Economics, in a note.

The Fed chooses PCE as a more reliable inflation gauge because it concentrates on what consumers spend on goods and services. The consumer price index (CPI) measures what goods and services cost in the marketplace. Moreover, officials dedicate more of a focus on core PCE because of the volatile swings of energy and food products that are out of their control.

Chair Jerome Powell and the Federal Open Market Committee (FOMC) have been pleased by the progress in the institution’s inflation fight. They have left interest rates unchanged at a range of 5.25 percent and 5.5 percent since July. According to the Summary of Economic Projections (SEP), the Fed expects to pull the trigger on three rate cuts next year, lowering the median policy rate to 4.6 percent.

Despite the dovish tilt at the December FOMC policy meeting, officials have expressed concern about the market’s ultra-bullish reaction to Mr. Powell’s press conference, with many saying that it is too premature to entertain the idea of cutting interest rates.

New York Fed President John Williams recently told CNBC that the central bank “isn’t really thinking about” when to slash rates. Atlanta Fed chief Raphael Bostic is penciling in just two rate cuts next year. Philadelphia Fed head Patrick Harker revealed that his colleagues do not plan to lower rates soon.

While Fed officials appear to be adopting a cautionary approach to monetary policy amid inflation risks, consumers have turned suddenly confident on the economy and inflation.

The University of Michigan’s Consumer Sentiment Index advanced to 69.7 in December, up from 61.3 in November. Measurements of current conditions and expectations also ballooned this month.

One-year-ahead inflation expectations cratered from 4.5 percent to 3.1 percent, and five-year inflation projections fell from 3.2 percent to 2.9 percent.

More Economic Data Before Christmas

The BEA released additional figures highlighting the state of the consumer.

Personal income rose 0.4 percent in November, up from an upwardly revised 0.3 percent in the previous month and topping the market forecast.

Personal spending inched higher by 0.2 percent, up from a downwardly revised 0.1 percent in October. This fell short of the consensus estimate of 0.3 percent.

The personal saving rate increased for the second straight month, touching 4.1 percent last month.

Recent figures could suggest that consumer demand is weakening, and the holiday shopping season could be the “last hurrah for consumers before they rein in spending,” added Mr. Doty.

Meanwhile, durable goods orders surged 5.4 percent in November, reversing the adjusted 5.1 percent crash in October.

New home sales plummeted 12.2 percent in November, totaling 590,000 units. This is significantly down from the previous month’s 4 percent drop, which was revised from the negative 5.6 percent decline seen in October.