US inflation continues to decline while consumer spending remains robust in December
January 26, 2024 – 6:58 AM PST
U.S. prices rose marginally in December, keeping the annual increase in inflation below 3% for a third straight month, bolstering expectations that the Federal Reserve will start cutting interest rates this year.
The timing of the anticipated rate cut is, however, uncertain as the report from the Commerce Department on Friday also showed consumer spending surging at the end of 2023 as Americans splurged over the holidays.
Financial markets have pushed the odds of a March rate cut to below 50% in a nod to the economy’s continued resilience. The U.S. central bank is expected to keep its policy rate unchanged at the current 5.25%-5.50% range at its meeting next week.
“The inflation trajectory is improving, giving the Fed leeway to cut rates this year,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “However, the Fed has further work to do and should not be tempted to declare ‘mission accomplished.’”
The personal consumption expenditures (PCE) price index increased 0.2% last month after an unrevised 0.1% drop in November, the Commerce Department’s Bureau of Economic Analysis said. Food prices rose 0.1% and the cost of energy products increased 0.3%.
In the 12 months through December, the PCE price index increased 2.6%, matching November’s unrevised gain. The inflation readings were in line with economists’ expectations.
Excluding the volatile food and energy components, the PCE price index gained 0.2% last month after rising 0.1% in November. The so-called core PCE price index increased 2.9% year-on-year, the smallest advance since March 2021, after rising 3.2% in November.
The Fed tracks the PCE price measures for its 2% inflation target. Monthly inflation readings of 0.2% over time are necessary to bring inflation back to target, economists say.
The dollar slipped against a basket of currencies. U.S. Treasury prices fell.
On Thursday, the government reported that core PCE inflation increased at a 2.0% annualized rate in the fourth quarter after a similar rise in the July-September quarter. Though prospects of a March rate cut have diminished, a reduction in borrowing costs is still expected by June. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.
Easing inflation, rising wages and households tapping their savings all combined to boost consumer spending and support the overall economy. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.7% last month after rising 0.4% in November. There were gains in outlays of both services and goods.
Spending on services was lifted by financial service charges, fees and commissions as well as healthcare and gambling. Americans also stepped up purchases of new light trucks and spent more on prescription medication, clothing and footwear and recreational goods and vehicles.
When adjusted for inflation, overall consumer spending increased 0.5% in December after a similar rise in the prior month. The solid increase in the so-called real consumer spending puts consumption on a higher growth trajectory heading into the first quarter.
The data was included in the fourth quarter’s advance gross domestic product report published on Thursday. Consumer spending increased at a strong 2.8% rate last quarter, accounting for the bulk of the economy’s 3.3% growth pace.
The pace of growth in consumer spending is, however, likely to moderate in the months ahead. Personal income increased 0.3% in December after rising 0.4% in November. The saving rate dropped to a one-year low of 3.7%, from 4.1% in November.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama
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How has the consecutive months with inflation below 3% impacted expectations of an interest rate cut by the Federal Reserve?
Title: U.S. Inflation Remains Below 3% for Third Consecutive Month, Pointing to Potential Interest Rate Cuts
Introduction:
On January 26, 2024, the U.S. announced that prices rose marginally in December, maintaining an annual inflation rate below 3% for the third consecutive month. This development has bolstered expectations of an interest rate cut by the Federal Reserve this year. However, the timing of the rate cut remains uncertain, as consumer spending surged at the end of 2023, indicating the economy’s resilience. While financial markets initially anticipated a rate cut in March, odds have dipped below 50%, suggesting that the central bank may maintain its current policy rate range of 5.25% to 5.50% during its upcoming meeting.
Inflation Figures and Impact:
The Personal Consumption Expenditures (PCE) price index increased by 0.2% in December after a previously unrevised 0.1% drop in November, according to the Commerce Department’s Bureau of Economic Analysis. While food prices rose by 0.1%, the cost of energy products increased by 0.3%. These figures align with economists’ expectations and indicate a yearly increase of 2.6% in the PCE price index, mirroring November’s unrevised gain.
Excluding the volatile food and energy components, the so-called core PCE price index increased by 0.2% last month, following a 0.1% rise in November. Year-on-year, the core PCE price index increased by 2.9%, the smallest advance since March 2021, after a 3.2% rise in November. It is worth noting that the Federal Reserve uses the PCE price measures to track its 2% inflation target. Economists suggest that consistent monthly inflation readings of 0.2% are necessary to bring inflation back on track.
Consumer Spending and Economic Outlook:
Consumer spending, which constitutes over two-thirds of U.S. economic activity, experienced significant growth of 0.7% in December, following a 0.4% increase in November, driven by rising wages, increased household spending, and savings. Spending on services was particularly boosted by financial service charges, fees, and commissions, as well as healthcare and gambling. Additionally, Americans increased their purchases of new light trucks, prescription medication, clothing, footwear, recreational goods, and vehicles.
Adjusted for inflation, overall consumer spending rose by 0.5% in December, indicating a higher growth trajectory for consumption in the first quarter. The solid increase in real consumer spending contributed significantly to the economy’s growth pace of 3.3% in the fourth quarter of 2023.
Future Expectations:
Despite the favorable consumer spending and overall economic activity, the pace of growth is expected to moderate in the coming months. Personal income increased by 0.3% in December, slightly lower than the previous month’s rise of 0.4%. This suggests that while consumer spending remains robust, the growth rate may decline. However, a reduction in borrowing costs is still expected by June, with the Federal Reserve having raised its benchmark overnight rate by 525 basis points since March 2022.
Conclusion:
The modest increase in U.S. prices and the consecutive months with inflation below 3% have bolstered expectations of an interest rate cut by the Federal Reserve. Although the exact timing of the cut remains uncertain, evidence of strong consumer spending, rising wages, and increased household savings provides support for the overall economy. As the U.S. moves forward, sustained efforts are necessary to ensure that inflation remains on track towards the Federal Reserve’s 2% target.
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