The Federal Reserve’s favored inflation metric, the personal consumption expenditure (PCE) price index, rose for the second month in a row as persistent price pressures continue to affect the central bank’s monetary policy strategies.
According to the Bureau of Economic Analysis (BEA), annual PCE inflation rose to 2.4 percent in November from 2.3 percent in October. Economists had expected PCE inflation to rise to 2.5 percent.
From the same time last year, goods inflation fell by 0.4 percent, while service prices spiked by 3.8 percent. Additionally, food costs swelled by 1.4 percent year over year, and energy prices fell by 4 percent.
From October to November, the PCE price index jumped by 0.1 percent.
Core PCE inflation, which excludes the volatile food and energy categories, remained unchanged at 2.8 percent, slightly below the consensus forecast of 2.9 percent. On a monthly basis, core PCE edged up by 0.1 percent.
BEA data also reported that personal income rose at a slower-than-expected pace of 0.3 percent, down from the upwardly revised 0.7 percent registered in October.
Personal spending rose to 0.4 percent, below the 0.5 percent estimate, up from 0.3 percent last month, according to the BEA.
Market Reaction
U.S. stocks remained in the red before the opening bell, with the leading benchmark indexes down as much as 0.9 percent.
Treasury yields were mainly down to finish the trading week. The 10-year Treasury yield fell to 4.5 percent. The 2- and 30-year yields slumped to 4.25 percent and 4.7 percent, respectively.
The U.S. dollar index, a measure of the greenback against a weighted basket of currencies, tumbled below 108.00. It is still poised for a weekly gain of about 0.8 percent, adding to its year-to-date rally of 6.5 percent.
“The market woke up in a terrible mood,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in a note emailed to The Epoch Times on Dec. 20.
However, the lower-than-expected PCE inflation figures helped pare some of the losses. Zaccarelli thinks the final minutes of the Dec. 20 trading session will be crucial to monitor.
“If the selling builds throughout the day and there is momentum (to the downside) heading into the weekend, then that would be a bad sign for next week; however, if we see some dip-buying later today and the market finishes significantly higher than the lows of the day would suggest, then that would make us more optimistic for next week,” he said.
The Stickiness of Inflation
Next month’s batch of inflation data is expected to continue the upward trend observed since the October numbers.
According to the Cleveland Fed’s Inflation Nowcasting model, the December consumer price index (CPI) report is expected to show the annual inflation rate rising to 2.9 percent. Core CPI inflation is estimated to hold steady at 3.3 percent for the fourth consecutive month.
December PCE and core PCE inflation are projected to come in at 2.8 percent and 3 percent, respectively.
These numbers are still firmly above the central bank’s 2 percent inflation goal, which Fed Chair Jerome Powell admitted at this week’s post-meeting press conference that the United States is still a “year or two” away from returning to target.
As a result of persistent above-trend inflation, the Fed has signaled fewer rate cuts heading into 2025.
“I think we’re in a good place, but I think from here it’s a new phase, and we’re going to be cautious about further cuts,” Powell stated, adding that he has been disappointed with how inflation has been moving “sideways” in recent months.
“It’s kind of common sense thinking that when the path is uncertain, you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”
Officials expect price pressures to ease in the coming years. The updated December Summary of Economic Projections report shows that the median PCE inflation rate is expected to slow to around 2 percent in 2026 and beyond.
The wild card might be President-elect Donald Trump’s proposed tariffs. While the Fed has not devised policy ahead of the incoming administration’s economic policies, Powell stated that he and his colleagues are beginning to assess the potential effects of higher tariffs, tax cuts, and immigration over the next few years.
While Powell said the Fed remained confident price pressures would continue to ease, he also acknowledged central bank staff and policymakers were beginning to at least preliminarily consider how Trump’s promises of higher tariffs, tax cuts, and tougher immigration policy will change the outlook.
“Some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecasts at this meeting,” Powell told reporters.
Byron Anderson, head of Fixed Income at Laffer Tengler Investments, has questioned why the Fed needs to continue cutting interest rates.
“Inflation has plateaued well above goal; unemployment has plateaued, and yet the Fed keeps cutting rates,” Anderson said in a note emailed to The Epoch Times. “My question is which of its dual mandates is it protecting the economy from by cutting?”
Anderson believes the Fed should have temporarily paused the rate-cutting cycle following the presidential election.
“The time to pause was after Trump won the election and wait to see what the implications of his administration will be,” he said. “There is going to be change and volatility with Trump, and the Fed may well have to about-face again and lose credibility with markets.”
The next two-day Federal Open Market Committee policy meeting will take place on Jan. 31 and Feb. 1.
According to the CME FedWatch Tool, the financial markets overwhelmingly expect the central bank to hit the pause button, leaving the benchmark federal funds rate between 4.25 percent and 4.5 percent.
From The Epoch Times