The Federal Reserve’s preferred inflation gauge showed prices rose as expected in December, and it remains above the central bank’s target level amid its ongoing efforts to wrestle down inflation.
The Commerce Department on Friday reported that the personal consumption expenditures (PCE) index was up 0.3% from the prior month and 2.6% on an annual basis. Those figures were in line with the estimates of economists polled by LSEG.
Core PCE, which excludes volatile food and energy prices, rose 0.2% for the month and increased 2.8% from a year ago, in line with estimates.
Federal Reserve policymakers are focusing on the PCE headline figure as they try to slow the pace of price increases to their target of 2%, though they view core data as a better indicator of inflation. Headline PCE ticked higher from an annual rate of 2.4% in November to 2.6% last month, while core PCE has been at 2.8% for three consecutive months.
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Headline PCE showed prices for goods were flat in December, while prices for services rose by 3.8% from a year ago. Food prices were up 1.6% last month when compared with a year ago, while energy prices were down 1.1% during that period.
Wages and salaries were up 0.4% in December compared with the prior month — a slight deceleration after October and November both saw wage and salary growth of 0.5% in those months.
The personal savings rate as a percentage of disposable income was 3.8% in December. That metric declined from 4.3% in October to 4.1% in November and had been nearly 5% last spring.
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“Despite the stickiness of inflation in recent months, the disinflationary trend should reemerge in the spring as services prices are set to moderate,” said Jeffrey Roach, chief economist for LPL Financial. “The personal savings rate currently is 3.8%, materially below the 2019 average of 6.7%, putting the consumer in a precarious position if incomes weaken.”
The Commerce Department’s report comes just two days after the Federal Reserve announced that they would hold interest rates steady in the first pause of this rate-cutting cycle after three consecutive cuts.
The Fed lowered its target range for the benchmark federal funds rate by 50 basis points in September, followed by a pair of 25 basis point cuts in November and December.
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Fed Chair Jerome Powell and other central bank policymakers noted that “inflation remains somewhat elevated” and opted to leave rates at a range of 4.25% to 4.5% given the uncertainty about changes in economic conditions.
The Fed is expected to hold rates steady at its next policy meeting in mid-March, with markets pricing in an 82% probability of policymakers leaving rates unchanged as of Friday, according to the CME FedWatch tool. That is up from just over 72% a week ago.
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