Inflation Slowing, Consumer Spending Down: Fed Raises Interest Rates

The Federal Reserve’s preferred measure of inflation for the U.S. cooled again in December, according to the Commerce Department’s Personal Consumption Expenditures (PCE) price index report released Friday.[0] Core PCE, which strips out the more volatile food and energy categories, increased by 4.4% annually, down from November’s annual rate of 4.7%.[1] Monthly, it increased by 0.3%.[2]

The PCE data comes as something of a reaffirmation of the December Consumer Price Index (CPI) report, which was released earlier in January.[3] The report indicated a 0.1% decrease in prices month-to-month, amounting to a 6.5% rise year-over-year, including a 5.7% surge in core inflation.[3] The drop in the PCE has been mirrored in other measures of inflation, such as the Labor Department’s consumer price index, which fell to 6.5 percent annually off a high last year of 9.1 percent, and the producer price index (PPI), which sank to a recent low of 6.2 percent in December, with core PPI hitting 4.6 percent.[4]

Consumers spent less in December, even as the pace of price increases cooled.[5] Adjusted for inflation, spending decreased by 0.2% in the month, a drop more significant than the 0.1% decrease predicted by Wall Street. In December, spending after accounting for inflation dropped by 0.2%, which was worse than the 0.1% decrease that Wall Street had predicted. After taking into account the effects of inflation, consumer spending dropped by 0.3% in real terms.

In March of 2022, the central bank took action to combat rising inflation, increasing the benchmark borrowing rate from the near-zero range to a target range of 4.25%-4.5%. In an effort to reduce inflation, the benchmark borrowing rate has been increased to a target range of 4.25-4.5%. At the upcoming Federal Open Market Committee policy meeting, analysts anticipate that the rate will go up by a quarter of a percent, with a similar increase occurring in March. After this, the Fed is expected to take a break and evaluate the effects of the rate increases on the economy.[6]

On Friday, a closely observed indication of consumer opinions on the economy demonstrated a rise in confidence in January for the second month consecutively.[2] January’s consumer sentiment index for the University of Michigan came in at 64.9, representing an increase of nearly 9% from the previous month.[7]

0. “PCE Data Show Another Drop in Fed’s Preferred Inflation Gauge” Barron’s, 27 Jan. 2023,

1. “Inflation cools further ahead of key Federal Reserve meeting” The Hill, 27 Jan. 2023,

2. “The Fed’s favorite inflation gauge shows price hikes cooled last month” KAKE, 27 Jan. 2023,

3. “Stock Market Crash Alert: Mark Your Calendars for Jan. 27” InvestorPlace, 24 Jan. 2023,

4. “PCE inflation rises 4.5% Y/Y in December, slowing from +4.7% in prior month” Seeking Alpha, 27 Jan. 2023,

5. “Key Fed Inflation Measure Eased in December While Consumer Spending Also Declined” NBC 5 Dallas-Fort Worth, 27 Jan. 2023,

6. “PCE Indicates Slowdown In Spending, Economy Weakens” MarketBeat, 27 Jan. 2023,

7. “The Fed’s favorite inflation gauge shows price hikes cooled last month” CNN, 27 Jan. 2023,