PCE inflation is still on track to fall to 2.0%, which can allow the Federal Reserve to cut interest rates again in the coming months.
The personal consumption expenditures (PCE) measure of inflation edged up slightly to 0.2% month-on-month in December, keeping the annual rate flat at 2.8% y/y.
However, when the data from the past six months are annualised, we get a figure of 2.8%, but when annualised over three months, that falls to 2.2%, consistent with a decline to 2%.
This suggests a trend of decline has started to emerge again following a pickup in prices seen through the middle part of 2024.
The Federal Reserve's mandate is to target PCE inflation at 2% over the longer run. The central bank announced this week that it would pause cutting interest rates until data confirmed the disinflation process was back on track.
"Inflationary pressures are easing in the long run and the upcycles should be looked through. By June the Fed should be confident enough in restarting the cutting cycle," says Kyle Chapman, FX Markets Analyst at Ballinger Group.
Fed caution will also be piqued by news that the measure of wages (the Employment Cost Index) came in at 0.9% q/q in Q4 (or 3.7% annualised), in line with expectations, but a notch higher than prior quarter.
"Wage growth is hovering in a range also slightly above what the Fed would consider consistent with 2% target, so there is still more work to be done and the Fed will remain on hold until it sees more sustained progress," says Ali Jaffery, an economist at CIBC Capital Markets.
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Paul Ashworth, Chief North America Economist at Capital Economics, says a lot now depends on whether we see any repeat of the surge in prices at the start of last year.
"If we are right in our belief that there is no residual seasonality at work, then the annual core PCE inflation rate should fall markedly over the first few months of this year."
He adds that the growing risk that Trump will impose tariffs presents an upside risk to inflation.
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