The indicator of inflation used by the Federal Reserve rose slightly in November, moving closer to the central bank’s target.
The core personal consumption expenditures price index, which excludes volatile food and energy prices, rose 0.1% for the month, 3.2% higher than a year ago, the Commerce Department reported Friday.
Economists surveyed by Dow Jones had expected increases of 0.1% and 3.3%, respectively.
On a six-month basis, core PCE rose 1.9%, suggesting the Fed has essentially met its target if current trends continue.
“Add in the further sharp slowdown in rental inflation that is yet to come, and it is difficult to see a credible reason why the annual inflation rate will not also return to the 2% target in the coming months,” wrote Andrew Hunter, U.S. deputy chief executive Economist at Capital Economics.
Markets had little reaction to the report as Wall Street expected mixed openings in its final session on Friday before the Christmas holiday.
Elsewhere in the report, consumer spending rose 0.3% in November while income rose 0.4%. These figures were in line with expectations and showed that spending continued to grow rapidly despite ongoing inflationary pressures.
Including food and energy costs, so-called total PCE actually fell 0.1% month-over-month and was just 2.6% higher than a year ago, after peaking at over 7% in mid-2022. According to the Fed, this was the first monthly decline since April 2020.
The 12-month numbers are significant because both show inflation steadily moving toward the Fed’s 2 percent target.
“The Federal Open Market Committee is not yet ready to declare victory on inflation, but the outlook is much brighter than it was a few months ago,” wrote Gus Faucher, chief economist at PNC Financial Services. “Slowing core inflation opens door to policy rate cuts in 2024; the timing will depend on core PCE numbers over the next few months.”
The Fed prefers PCE as a measure of inflation over the more widely used CPI because the former focuses more on consumers’ actual spending rather than what goods and services cost. Although policymakers are keeping an eye on both metrics, they are more concerned with core prices as a longer-term indicator of inflation.
The November report reflected a shift in consumer appetite as prices for services rose 0.2% while prices for goods fell 0.7%. A 2.7% fall in energy prices and a 0.1% decline in food helped curb inflation this month.
Much of the market’s focus lately has been on the Fed’s view of inflation and what that will mean for interest rates.
At each of its last three meetings, the Federal Open Market Committee stuck to its guns, keeping its target benchmark federal funds rate between 5.25% and 5.5%. At its meeting last week, the committee announced it was done raising rates and expected to implement cuts totaling 0.75 percentage points in 2024. Markets expect the first rate cut to occur in March.
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