The Federal Reserve’s preferred gauge of underlying inflation barely rose in November and trailed policymakers’ 2% target by one measure, reinforcing the central bank’s pivot toward interest-rate cuts next year.
The so-called core personal consumption expenditures price index, which strips out the volatile food and energy components, increased 0.1% from a month earlier after a downwardly revised 0.1% gain in October, according to the Bureau of Economic Analysis. From a year ago, the Fed’s preferred gauge of underlying inflation advanced 3.2%.
On a six-month annualized basis, the core metric rose 1.9%, the first time in more than three years that this measure is below the Fed’s target.
While inflation data are good news for the Fed, robust income figures in Friday’s report may help fuel consumer spending and lead central bankers to wait before easing policy.
Below Target by One Measure | Underlying US inflation has drifted below Fed's goal for first time in three years
See also: Option traders bet on deep Treasury market sell-off within weeks
Consumers remained optimistic that inflation will improve in the final December reading from the University of Michigan, also out Friday, contributing to a robust rebound in sentiment. However, US new-home sales unexpectedly slumped in November, suggesting a bumpy road to recovery for the housing market.
In the BEA report, personal spending, adjusted for changes in prices, rose 0.3% after a downwardly revised 0.1% advance in October. Real disposable income, the main support to consumer spending, climbed the most since March.
A sustained easing of price pressures and resilient household demand are consistent with views of a soft landing for the economy. Inflation that’s in line with the Fed’s 2% goal also explains why Chair Jerome Powell and other policymakers have set the table for interest-rate cuts in coming quarters.
See also: Citi’s strategists say Fed should pause, opposing its economists
The overall PCE price index fell 0.1% from October, the first decline since April 2020. The measure advanced 2.6% from a year ago, the smallest gain since February 2021.
“The Fed has to be satisfied that it has done enough to bring inflation down to the 2% target,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “It’s no surprise that Powell signalled that the hiking cycle is over and now it’s a matter of time before the rate cuts begin. The Fed will look at several data points to assess how soon and how much to cut.”
Policymakers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric advanced 0.1% for a second month, and rose 2.7% from a year earlier.
The pickup in spending suggests households can continue to keep the economy moving forward despite higher borrowing costs. A resilient yet moderating job market remains the main engine driving demand.
On an inflation-adjusted basis, outlays for goods increased 0.5%, the report showed. Services spending rose 0.2% for a third month.
Real disposable income climbed 0.4% in November. Wages and salaries, unadjusted for inflation, jumped 0.6%, also the most in eight months. The saving rate rose to 4.1%.
A separate report out Friday showed durable goods orders rebounded 5.4%, led by commercial aircraft.
