Affordability

Fed’s Preferred Gauge Shows Accelerating December Inflation Trends

The personal-consumption expenditures price index increased by 0.4% in December

Key inflation metrics tracked by the Federal Reserve accelerated at the end of last year, underscoring why many Fed officials have turned cautious about supporting further interest-rate cuts.

The personal-consumption expenditures price index increased by 0.4% in December, after rising by 0.2% in November, the Commerce Department said Friday.

That lifted the 12-month PCE inflation rate to 2.9%, up from 2.8% in November. Core PCE inflation—which excludes volatile food and energy prices—ticked up to 3% in the 12 months through December, from 2.8% a month earlier.

The numbers are roughly aligned with forecasts from analysts, who can use other inflation metrics to forecast PCE inflation with great accuracy. The report also is more lagged than usual, because last fall’s government shutdown has caused cascading delays in the Bureau of Economic Analysis’s publication calendar.

But the figures point to one reason many Fed officials have turned hesitant about easing their policy stance further despite January’s decline in the consumer-price index, now at 2.4%. PCE inflation, not the CPI, is the metric against which the Fed gauges progress toward its 2% inflation target, and it has consistently hovered above that target for most of half a decade.

Much of the time, PCE inflation tends to run cooler than CPI inflation, but for now, the pattern has reversed. That is in large part because housing inflation, which has cooled steadily, plays a bigger part in the CPI calculation than in the PCE calculation, UBS economist Alan Detmeister has observed.

Minutes from the Fed’s January meeting published Wednesday showed that a contingent of Fed officials thinks that at 3.5% to 3.75%, the Fed’s current rate target is near a neutral level that is no longer working to restrain economic growth and rising prices. At last month’s Fed meeting, the minutes showed, one set of officials urged the group to consider communicating that going forward, rate increases may be as much a possibility as further cuts.

The December PCE inflation numbers are unlikely to be very impactful for traders, who are largely already focused on what the January PCE inflation reading will show when released on March 13. That will be the latest PCE data the Fed will have in hand at its next policy meeting, March 17-18.

Using numbers available from the January CPI report, many economists are estimating that the January PCE data will show 12-month core inflation steady at 3% or even increasing to 3.1%.

The report also showed that Americans’ personal income rose by 0.3% in December, while their consumer spending increased by 0.4%.