PCE, a key measure of inflation, cooled in December

PCE, a key measure of inflation, cooled in December

HAS inflation measurement Under the watchful eye of the Federal Reserve, the slowdown continued in December, the latest sign that price increases are once again under control, even if growth remains solid and the job market healthy. Particularly positive, a key indicator of price growth fell below 3% for the first time since the start of 2021.

The personal consumption expenditures price index rose 2.6 percent last month from a year earlier. This was in line with what economists had predicted and matched that of November.

But after deducting the costs of food and fuel, which can vary from month to month, the “core” price index climbed 2.9% compared to December 2022. This follows to a reading of 3.2% in November, and was the lowest since March 2021.

Fed officials are aiming for a 2 percent price hike, so current inflation remains high. It is nevertheless much lower than its about 7 percent peak in 2022. In their latest economic projections, central bankers predicted that inflation cool to 2.4 percent by the end of the year.

As inflation returns to its target, policymakers have been able to scale back their campaign to slow the economy. Fed officials raised interest rates to a range of 5.25% to 5.5%, a sharp rise from near zero in early 2022. But they kept borrowing costs at this level since July – giving up on a final rate increase they had previously predicted. – and have signaled they may cut interest rates several times this year.

The authorities are trying to complete the process of slowing the economy smoothly, without inflicting serious economic hardship, in what is often called a “soft landing.”

“The important point here is that the data is still consistent with a relatively soft landing, at least for now,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. Between strong growth and more moderate inflation, “they get the best of both worlds”.

Now, investors are closely watching when and to what extent policymakers will reduce borrowing costs.

Fed officials walk a delicate line when deciding what to do next. Keeping rates too high for too long could risk cooling the economy more than is strictly necessary. But a premature cut in these rates could allow the economy to heat up, making it difficult to fully control inflation.

Fed policymakers will meet next week, and officials are expected to leave interest rates unchanged at the end of that meeting on January 31. Still, markets will be closely watching a news conference with Jerome H. Powell, the Fed Chairman, to get an idea of ​​what might happen. following.

Mr. Powell perhaps provides insight into how the Fed views the interplay between growth and inflation. The economy continues to grow at a healthy pace and unemployment is very low, which many economic models suggest could lead to accelerating inflation.

Friday’s report showed that consumption grew more than economists expected in December, for example, especially after adjusting for low inflation.

But so far, price increases have continued to moderate despite this dynamic. This has occurred as the labor market balances, pandemic-related supply chain issues fade, and rent increases fall to more normal levels.

Given this, officials have focused more on current price figures in recent months when discussing the political outlook. But they still consider growth when thinking about policy.

Rapid growth is “only a problem insofar as it makes it more difficult to achieve our goals,” Mr. Powell said in December. “This will likely put some upward pressure on inflation.” This could mean it will take longer to reach an inflation rate of 2%. This could mean we have to keep rates high for longer.

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David B.Otero

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