New data released on January 26th suggests that the inflation rate in the United States may be decreasing.
This supports predictions that the Federal Reserve will reduce interest rates this year.
However, it is unclear when the rate cuts will occur.
________________________________________________________________________
- Slowing inflation supports predictions the Fed will start cutting interest rates in 2024.
- However, strong consumer spending and inflation above the 2% target means the Fed will be cautious about reversing policy too quickly.
________________________________________________________________________
Moderate Inflation in December Backs 2024 Fed Rate Cuts
The Commerce Department reported that the personal consumption expenditures (PCE) price index rose 0.2% in December after a 0.1% decrease in November.
The PCE index increased by 2.6% in 2022, similar to the November gain.
This has kept the annual inflation rate below 3% for the third consecutive month.
Excluding food and energy prices, the core PCE inflation rose by 0.2% in December and 2.9% over the past 12 months.
This represents the smallest core inflation gain since March 2021, down from 3.2% in November.
The Federal Reserve monitors PCE inflation closely to assess progress towards its 2% target.
To bring inflation back to ideal levels, consecutive monthly gains of 0.2% are required.
Some economists argue that the core inflation is already at target levels based on annualized data.
In the past three months, core PCE inflation has increased at a 1.5% annualized pace.
Over the past six months, it has risen at a pace of 1.9%.
The government also reported that fourth-quarter core PCE inflation advanced 2.0%, matching the previous quarter.
This trend supports Fed rate cuts later in 2024, though a decrease in March now seems less likely.
The economy’s continued strength has caused financial markets to reduce the odds of a March cut to below 50%.
The Fed is still expected to leave rates unchanged at its upcoming January 2024 meeting.
Jeffrey Roach, chief economist at LPL Financial, said, “The inflation trajectory is improving, giving the Fed leeway to cut rates this year.
However, the Fed has further work to do and should not be tempted to declare ‘mission accomplished.'”
Since March 2022, the Fed has raised rates by 525 basis points to combat inflation.
Easing price pressures combined with rising wages, strong consumer spending, and households tapping savings point to rate cuts by June.
The December inflation data came alongside a report showing robust 0.7% monthly growth in consumer spending.
Americans spent more on vehicles, clothing, recreation, and healthcare services.
Adjusted for inflation, spending rose 0.5%.
Solid consumer spending supports GDP growth, though the pace may moderate.
While lower inflation boosts households’ purchasing power, reduced government aid and higher borrowing costs could slow future gains.
In summary, the December PCE report indicates cooling inflation, which supports Fed interest rate cuts later in 2024 as price stability improves.
However, resilient consumer spending and inflation above 2% targets mean the central bank will proceed cautiously before reversing course on tightening monetary policy.
Stay ahead of the curve with exclusive insights delivered straight to your inbox!
Don’t miss out – subscribe now to our newsletter and be the first to know about the latest developments in finance, real estate, and global markets.
Join our community of informed subscribers today!
Leave a Reply