Inflation fell once again to a 5% rate for the year ending in December, as measured by the gauge favored by the Federal Reserve.
The decline in the personal consumption expenditures price index reported Friday morning by the Bureau of Economic Analysis is a sign that inflationary pressures are abating in the face of the Fed’s campaign to slow economywide spending by hiking interest rates. The 5% 12-month inflation rate is the lowest since September 2021. Nevertheless, inflation is still running hotter than the central bank’s target and dinging household purchasing power.
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Core PCE inflation, a measure of inflation that strips out energy and food prices and is generally less volatile, is clocking in at a 4.4% year-over-year rate.
The Fed’s target for inflation is 2%.
“The downshift in inflation means the Fed can downshift rates a second time to just 25 bps at the next decision date on Wednesday, Feb. 1, next week,” said Chris Rupkey, chief economist at FWDBONDS.
The central bank has been tightening monetary policy at a dramatic pace in a desperate bid to bring down the inflation that has hit households hard and damaged President Joe Biden’s ratings.
In some good news for the economy, other recent inflation reports have shown that prices are coming down. Overall inflation has declined from above 9% in June to 6.5% in December, according to the consumer price index.
Despite the rate hikes, the labor market has not yet been battered by the Fed’s actions.
The economy gained 223,000 jobs in December, the Bureau of Labor Statistics reported this month, and unemployment was at an ultra-low 3.5%. The last time the unemployment rate was this low was right before the pandemic took hold back in 2020.
Last month, the central bank conducted a downsized half-percentage-point rate increase. That, added to several aggressive 0.75% increases, marks the largest hikes in four decades. Since the start of the year, the Fed has ratcheted up rates by 425 basis points.
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The Federal Open Market Committee will meet at the end of the month to decide what to do next with its interest rate target.
Investors are now pegging the odds of a 0.25 percentage point hike at about 98%, according to CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
