Inflation Remains Under Control as Fed's Preferred Gauge Cools Again

The Federal Reserve's preferred measure of inflation rose 4.4% annually in December, down from 4.7% in November. This is the latest sign that the era of red-hot prices is coming to an end, and that the Fed may soon pivot to a less aggressive monetary policy stance.

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The core personal-consumption expenditures (PCE) price index, also known as the core PCE deflator, rose 4.4% on an annual basis in December, in line with expectations of economists surveyed by FactSet. This is a slight decrease from the 4.7% growth seen in November.

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The PCE deflator, which includes food and energy prices, declined to 5% in December from 5.5% in November, further evidence of cooling inflation.
Investors who have been welcoming declines in inflation as a sign that fewer interest rate increases may be on the way seemed mostly unmoved by the latest news, which does little to advance the narrative around price pressures. Futures contracts tracking the Dow Jones Industrial Average and the S&P 500 both ticked slightly higher after the release, but were still poised to open in the red.

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This is a developing story. Please check back soon for more detail and analysis. Below is a look at what economists were expecting before the data were released.
The Federal Reserve's preferred measure of inflation is set to show that prices continue to trend downward. The central bank could soon ease up in its battle against elevated prices.

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The core PCE price index for November rose 4.7% from a year ago, matching expectations. However, earnings and spending data raised concerns among some analysts.
The core personal-consumption expenditures price index is expected to have increased by 4.4% year-over-year in December, according to consensus estimates of economists surveyed by FactSet. This is a slight slowdown from November’s 4.7% growth. On a month-over-month basis, the index is projected to have increased by 0.3%.This index, also known as the core PCE deflator, gauges the prices that U.S. consumers are paying for goods and services, excluding food and energy.

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The headline PCE deflator, which includes food and energy, is estimated to be flat month over month. This measure is set to be released at 8:30 a.m. Eastern on Friday.
The indicators should confirm recent data at the consumer level. Concerns remain as inflation falls for the 6th straight month. The consumer-price index fell 0.1% over the month in December, compared with a 0.1% climb in November. However, the cost of services is a problem.Continue reading that suggest inflation is past its peak. That should relieve some pressure on the Fed, which embarked on a determined campaign of tightening financial conditions over the past year to combat elevated consumer prices. It should also relieve pressure on investors: The Fed’s seven interest-rate increases in 2022—including its largest in decades—were a major headwind for the stock market, with the S&P 500 tumbling nearly 20% in 2022.

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The consumer-price index fell 0.1% over the month in December, compared with a 0.1% climb in November. However, the cost of services remains a problem.
Despite this, Fed officials have signalled that their priority remains fighting inflation, and that they will continue to raise interest rates in 2023. Futures markets are predicting a 25 basis-point rate increase next week, when the Fed’s rate-setting committee meets on Jan. 31 and Feb. 1. This would be the central bank’s smallest rate increase since it first began tightening financial conditions last March. The PCE prints will be the last pieces of comprehensive inflation data that Fed officials will review before making their monetary policy decision.

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Investors will have some clarity going into Friday, as the PCE data for the fourth quarter was included in the U.S. GDP report released Thursday. GDP growth was higher than expected last quarter, but there are signs of weakness in the data. The next inflation report is due on Friday. GDP growth was stronger than expected last quarter, but there are signs of weakness in the data. The next inflation report is due on Friday. The Core PCE (Personal Consumption Expenditures) index increased by 3.9% in the fourth quarter of 2022, according to the latest GDP report. While there could be revisions to November data influencing that figure, analysts are still able to crunch the numbers to produce a December estimate. It looks like consensus is about spot-on.

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"The core PCE data suggest a 0.28% increase in the December number, in line with the consensus for tomorrow's report," said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. "However, this assumes no revisions to prior data. We expect a 0.2% December increase and a small upward revision to November. Either way, the trend is slowing."

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While the Fed's preferred inflation measure is PCE, this doesn't give the full picture as the central bank considers its monetary policy path forward. Fed Chairman Jerome Powell and other officials have said they are also closely watching tightness in the labor market as a barometer for the health of the US economy. Weekly labor data released on Thursday confirmed that jobless claims continue to trend downward, and Fed officials will also be able to review ECI data on January 31, the day before they announce their next rate decision.

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"It is difficult to see unemployment rising to the required rate to moderate wage inflation at these levels of growth," Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management, said in a note after Thursday's GDP release. "We need activity weakness to translate to job losses to address Powell's preferred services ex-shelter inflation metric, where wages are the primary driver."