The Federal Reserve favors inflation data; PCE remains moderate, supporting further rate cut expectations
The Federal Reserve's preferred core inflation indicator, PCE, remained moderate in December last year, supporting expectations for further interest rate cuts. Data shows that the core PCE price index, excluding food and energy, rose 0.2% from November and increased 2.8% year-on-year. The annualized growth rate of core PCE over three months is 2.2%, the lowest since July last year. Federal Reserve Chairman Jerome Powell stated that interest rate cuts would only be considered after clear evidence of inflation returning to the 2% target. U.S. consumer spending continues to grow strongly, with real spending increasing by 0.4%
According to the Zhitong Finance APP, the Federal Reserve's preferred core inflation indicator remained moderate in December last year, supporting further interest rate cuts this year.
Data released by the Bureau of Economic Analysis on Friday showed that the core Personal Consumption Expenditures (PCE) price index, excluding food and energy prices, rose 0.2% from November and increased 2.8% year-on-year. On a three-month annualized basis—this more accurate measure of inflation trends—the core PCE price index rose 2.2%, marking the lowest growth rate since July last year.
This data helps alleviate market concerns about a rebound in inflation. In previous months, inflation had briefly accelerated, but the latest data indicates that pressures have eased. Federal Reserve Chairman Jerome Powell stated after announcing that interest rates would remain unchanged on Wednesday that officials need to see clear evidence of inflation further retreating towards the 2% target before considering rate cuts. He also mentioned that policymakers remain vigilant about the uncertainties that former President Trump's economic policies may bring.
Following the release of the inflation data, U.S. stock futures maintained their upward trend, while U.S. Treasury yields experienced fluctuations. Additionally, another data set released at the same time indicated that U.S. labor cost growth has slowed, with the fourth-quarter growth rate reaching its lowest level since 2021.
The PCE report also showed that core service prices (excluding housing and energy), closely monitored by the Federal Reserve, rose 0.3% from the previous month, similar to the increases seen in previous months; core goods prices (excluding food and energy) fell 0.24%, marking the largest decline in the past year based on unrounded data.
At the same time, the "market-based" core PCE index, considered a more accurate measure of supply and demand, rose 0.1% for the second consecutive month, with the year-on-year growth rate dropping to 2.4%. In recent years, Federal Reserve officials have increasingly referenced this indicator to more accurately assess inflationary pressures.
The PCE report also indicated that U.S. consumer spending continues to grow strongly, with previous month data also revised upward. After adjusting for inflation, real spending grew by 0.4%, maintaining robust expansion for two consecutive months. However, real disposable income has stagnated for the second month in a row, which may prompt consumers to rely more on savings for spending. Data shows that the U.S. savings rate has fallen to its lowest level in two years, reflecting rising financial pressures for some households.
Markets and policymakers will also closely monitor changes in the seasonal adjustment factors of the Consumer Price Index (CPI) to be released next month, as this index has a significant impact on the PCE inflation indicator