The Federal Reserve's favorite inflation indicator is mild, with the core PCE price index rising 2.8% year-on-year, and real income is weak

The Federal Reserve's favorite inflation indicator—the U.S. PCE price index—showed December data in line with expectations, continuing to maintain relatively moderate growth. Additionally, weak real income may support further interest rate cuts by the Federal Reserve in the future.

On January 31st, Friday, the U.S. Bureau of Economic Analysis released data showing:

The U.S. December PCE price index rose 2.6% year-on-year, matching expectations, with the previous value in November at a rise of 2.4%. The December PCE price index rose 0.3% month-on-month, in line with expectations, with the previous value in November at a rise of 0.1%.

Excluding the more volatile food and energy prices, the U.S. December core PCE price index rose 2.8% year-on-year, matching expectations and the previous value. The December core PCE price index rose 0.2% month-on-month, in line with expectations, with the previous value in November at a rise of 0.1%.

Calculated using the three-month annualized rate, which economists believe can more accurately reflect inflation trends, the core PCE price index rose 2.2%, the lowest increase since July, down from 2.6% in November.

The closely watched core services prices, excluding housing and energy, rose 0.3% month-on-month, similar to levels in previous months. Core goods prices, excluding food and energy, fell 0.24%, marking the largest single-month decline in the past year when calculated without rounding.

The market-based core PCE price index rose 0.1% for the second consecutive month, with a year-on-year increase of 2.4%. The market-based PCE price index excludes estimated prices and does not include some service industry data, which cannot be directly measured and must be estimated. For example, portfolio management and investment advice are significant items not included, primarily tracking U.S. stocks, and several types of insurance are also excluded. Federal Reserve officials have pointed out in recent months that this indicator better reflects market supply and demand conditions than the overall index.

Personal Spending and Income

The report also showed strong consumer spending. Inflation-adjusted personal consumption expenditures rose 0.4%, marking the second consecutive month of robust growth, with the previous value also revised upward:

U.S. December personal consumption expenditures (PCE) rose 0.7% month-on-month, higher than the expected rise of 0.5%, with the previous value at a rise of 0.4%.

The December real personal consumption expenditures (PCE) rose 0.4% month-on-month, exceeding the expected rise of 0.3%, with the previous value at a rise of 0.3%.

U.S. December personal income rose 0.4% month-on-month, in line with expectations, with the previous value at a rise of 0.3%. However, real disposable income has seen almost no growth for the second consecutive month. This may force consumers to draw more on their savings.

The December savings rate has dropped to 3.8%, the lowest level in two years. Analysis indicates that this is far below the pre-pandemic average, meaning that if income declines, consumers' situations will become precarious.

Analysis and Market Reaction

Media analysis states that the latest PCE data should help alleviate concerns about inflation potentially rising again. Federal Reserve Chairman Jerome Powell stated on Wednesday that more substantial progress towards the 2% inflation target needs to be seen before lowering borrowing costs again, while remaining vigilant about the uncertainties brought by President Trump's policies.

Bloomberg analysis suggests that consumer spending is expected to perform strongly by the end of 2024, with accelerated growth in December due to strong demand for durable goods. We suspect that consumers are trying to purchase goods before prices rise, as they are concerned that the tariffs proposed by President Trump may lead to price increases.

Nick Timiraos, a well-known financial journalist referred to as the "New Federal Reserve Correspondent," stated on the X platform:

If you conclude that the improvement in inflation has stalled based solely on year-on-year data, it might be worth observing for a few more months. We are about to compare with some previous high base values, particularly the peaks of core PCE in January and March 2024.

Of course, we cannot rule out the possibility of the U.S. experiencing another surge in inflation at the beginning of the year, or changes in pricing behavior post-pandemic, and the existing seasonal adjustments may not fully capture these phenomena.

But for now, both the 3-month and 6-month inflation indicators of core PCE are below the year-on-year data for 12 months. What we see is that inflation in September and October last year was relatively "sticky," while the data for November and December was noticeably milder.

Another report released alongside the PCE data shows that the growth rate of U.S. labor costs is slowing, with the increase in the fourth quarter being the lowest level since 2021:

The U.S. Bureau of Labor Statistics reported on Friday that the Employment Cost Index, which tracks wages and benefits, increased by 3.8% year-on-year in the fourth quarter, marking the lowest growth rate in over three years.

After the release of the U.S. December PCE data, the U.S. dollar index and U.S. stock futures showed little short-term volatility:

• U.S. stock futures showed little short-term volatility, with the Nasdaq 100 index futures maintaining an increase of about 0.7%.
• The yield on the U.S. 10-year Treasury bond rose short-term, reported at 4.523%.
• The U.S. dollar index showed little short-term volatility, reported at 108.21.
• Spot gold showed little short-term volatility, reported at $2805.11 per ounce