Fed’s Preferred Inflation Measure Rises to 7-Month High

A person walks down a street with shopping bags in New York City, on Nov. 29, 2024. David Dee Delgado/Getty Images

The Federal Reserve’s preferred inflation gauge rose for the third consecutive month to its highest level in seven months, supporting the U.S. central bank’s decision to pause its interest rate-cutting cycle.

According to the Bureau of Economic Analysis (BEA), the annual Personal Consumption Expenditures (PCE) price index—a measure that uses a broader range of goods and services—increased to 2.6 percent in December from 2.4 percent in November.

The year-over-year PCE reading was in line with market expectations.

On a monthly basis, PCE edged up 0.3 percent, up from 0.1 percent in November.

Core PCE, which excludes fluctuating energy and food prices, remained unchanged for the third straight month at 2.8 percent, the highest since April. However, it jumped 0.2 percent from November to December.

BEA data showed that consumption levels ended 2024 on a high note. Personal spending surged at a higher-than-expected pace of 0.7 percent last month, slightly up from the upwardly revised 0.6 percent in November.

Personal income jumped 0.4 percent, matching consensus forecasts. This was also up from 0.3 percent the previous month.

The personal saving rate—personal saving as a percentage of disposable personal income—dipped below 4 percent in December. This is below the 2019 average of 6.7 percent.

U.S. stocks kept their pre-opening bell gains intact following the latest inflation report, as the PCE did not come in higher than economists’ expectations.

Treasury yields rose across the board, with the benchmark 10-year yield eyeing 4.53 percent.

The U.S. Dollar Index (DXY), a measurement of the greenback against a weighted basket of six currencies, such as the euro and Japanese yen, remained above 108.00. The index, which has been volatile this month, is poised for a weekly gain of 0.7 percent and a January decline of 0.2 percent.

A Sticky Path

Forecasts suggest that the three-month revival in inflation might have reached its zenith.

The Federal Reserve Bank of Cleveland’s Inflation Nowcasting model indicates that the Consumer Price Index (CPI) will hold steady at about 2.9 percent, and the PCE will come in at 2.4 percent.

“Despite the stickiness of inflation in recent months, the disinflationary trend should reemerge in the spring as services prices are set to moderate,” said Jeffrey Roach, the chief economist at LPL Financial.

Still, this is not the progress the U.S. central bank wishes to see.

At this week’s January policy meeting of the Federal Open Market Committee (FOMC), Fed officials toughened their examination of inflation, writing in a statement that “it remains somewhat elevated.”

Minutes from the December meeting of the FOMC indicated that monetary policymakers were worried about inflation risks arising from the current economic situation and the new administration’s policy plans.

The fears have not been enough to justify an interest-rate hike. Instead, Fed Chair Jerome Powell signaled to reporters at the post-meeting press conference that he and his colleagues are in a wait-and-see mode.

Federal Reserve Chairman Jerome Powell prepares to deliver remarks in Washington. Chip Somodevilla/Getty Images

“With the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” Powell said.

Investors do not expect the next rate cut until June, according to the CME FedWatch Tool.

So, what would prompt the Fed to cut rates? Tom Essaye, the founder and president of Sevens Research Report, says it would be core PCE moving closer to 2 percent and that there’s a jump in the unemployment rate.

“Bottom line, the Fed needs further progress on inflation (that re-instills more confidence in hitting the 2 percent target) or a sudden growth scare to again cut rates,” Essaye wrote in a note emailed to The Epoch Times. “Until one of those two things happens, it’s likely the Fed is on hold (and that is a headwind on stocks).”

Fed officials have expressed that they can afford to be patient, as both the economy and labor market remain strong and stable.

For Torsten Slok, Apollo Global Management’s chief economist, the U.S. economy’s solid performance has been supported by higher prices across many sectors.

“The strong momentum in the economy is driven by high stock prices, high home prices, and strong tailwinds to growth from tech capex spending, defense spending, and spending driven by the CHIPS Act, the IRA [Inflation Reduction Act], and the Infrastructure Act,” Slok said in a note emailed to The Epoch Times.

“The narrative that the economy is slowing and inflation is moving down to 2 percent is wrong.”

Other metrics have highlighted stubborn price pressures outside the key inflation reports.

The Institute for Supply Management and the S&P Global Manufacturing Purchasing Managers’ Indexes (PMIs)—a gauge of the prevailing economic direction in the sector—have reported higher prices. Likewise, the services PMIs accelerated last month.

“Higher input cost and selling price inflation was broad-based across goods and services and, if sustained, could add to worries that a combination of robust economic growth, a strong job market, and higher inflation could encourage a more hawkish policy approach from the Fed,” said Chris Williamson, the chief business economist at S&P Global, in the flash January report.

Still, Fed governor Michelle Bowman is confident that inflation will decelerated throughout the year, telling the New England CEO Summit that the institution needs to hold steady until this occurs.

“There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to see progress in lowering inflation resume before we make further adjustments to the target range,” Bowman said in a Jan. 31 speech. “I do expect that inflation will begin to decline again and that by year-end it will be lower than where it now stands.”

Powell and his colleagues have warned that restoring the Fed’s 2 percent inflation target would be turbulent, and the American public is feeling the bumps in the road.