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, https://www.barrons.com/articles/pce-index-inflation-data-report-today-51674762709
1. “Inflation cools further ahead of key Federal Reserve meeting” The Hill, 27 Jan. 2023, https://thehill.com/policy/finance/3832937-inflation-cools-further-ahead-of-key-federal-reserve-meeting/
2. “The Fed’s favorite inflation gauge shows price hikes cooled last month” KAKE, 27 Jan. 2023, https://www.kake.com/story/48247881/the-feds-favorite-inflation-gauge-shows-price-hikes-cooled-last-month
3. “Stock Market Crash Alert: Mark Your Calendars for Jan. 27” InvestorPlace, 24 Jan. 2023, https://investorplace.com/2023/01/stock-market-crash-alert-mark-your-calendars-for-jan-27/
4. “PCE inflation rises 4.5% Y/Y in December, slowing from +4.7% in prior month” Seeking Alpha, 27 Jan. 2023, https://seekingalpha.com/news/3928933-pce-inflation-rises-45-yy-in-december-slowing-from-47-in-prior-month
5. “Key Fed Inflation Measure Eased in December While Consumer Spending Also Declined” NBC 5 Dallas-Fort Worth, 27 Jan. 2023, https://www.nbcdfw.com/news/business/money-report/key-fed-inflation-measure-eased-in-december-while-consumer-spending-also-declined/3180192/
6. “PCE Indicates Slowdown In Spending, Economy Weakens” MarketBeat, 27 Jan. 2023, https://www.marketbeat.com/originals/pce-indicates-slowdown-in-spending-economy-weakens
7. “The Fed’s favorite inflation gauge shows price hikes cooled last month” CNN, 27 Jan. 2023, https://www.cnn.com/2023/01/27/economy/pce-inflation-december/index.html