The US Department of Commerce reported on Friday (27th) that the US inflation rate measured by the personal consumption expenditures (PCE) price index fell to 5% in December from 5.5% in November.
The core PCE price index, the Fed’s preferred inflation measure, fell to 4.4% annually from 4.7% in the same period, in line with market expectations. On a monthly basis, core PCE inflation and headline PCE inflation rose 0.3% and 0.1%, respectively.
In addition, personal income rose 0.2% month-on-month in December, but personal spending fell 0.2%.
U.S. consumer spending fell in December and the economy is on a lower growth trajectory heading into 2023, while inflation continues to recede, potentially giving the Fed room to further slow the pace of interest rate hikes next week.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, fell 0.2 percent in December, the Commerce Department said; November’s figure was revised down to show a 0.1 percent decline instead of a previously estimated 0.1 percent rise. Economists had forecast consumer spending would fall 0.1%.
This weak transition into 2023 increases the risk of a recession in the second half of the year, but also reduces the need for the Fed to maintain an aggressive monetary policy stance. The Fed’s fastest rate hike cycle since the 1980s has pushed the housing market into recession and manufacturing is in the early stages of a downturn.
Higher borrowing costs dent demand for commodities, which are often bought on loan. Even if growth in spending on services helps stabilize consumption, some households, especially those with lower incomes, have depleted savings accumulated during the pandemic, limiting the scope for gains.
The personal consumption expenditures (PCE) price index edged up 0.1 percent in December following a similar rise in November. On a year-over-year basis, the PCE price index rose 5 percent following rising 5.5 percent in November.
The core PCE price index, which excludes volatile food and energy components, rose 0.3 percent following rising 0.2 percent in November. The core PCE price index rose 4.4% year-over-year in December, following rising 4.7% in November.
The Fed’s monetary policy is closely linked to the PCE price index. Other measures of inflation also slowed notably.
The Fed last year raised its policy rate by 425 basis points from near zero to a range of 4.25%-4.50%, the highest level since late 2007. According to the CME’s FedWatch tool, financial markets have already priced in the possibility of a 25 basis point rate hike at the Jan. 31-Feb. 1 meeting.