The primary Federal Reserve inflation rate, the core PCE price index, showed that price pressures cooled more than expected in December, keeping a March rate cut on the table. The S&P 500 fell slightly on Friday afternoon, following another record closing high on Thursday.
Primary Fed Inflation Rate
The personal consumption expenditures, or PCE, price index rose 0.2% in December, in line with forecasts. The 12-month headline inflation rate held at 2.6%, below 2.7% predictions.
Typically, Federal Reserve decision-making puts more weight on core inflation, which strips out volatile food and energy prices. The core PCE price index rose 0.2% in December, matching forecasts. However, the core 12-month inflation rate eased to 2.9% from 3.2% in November, undercutting Wall Street expectations of 3% core inflation.
Federal Reserve chair Jerome Powell has said policymakers wanted to see six months of tame inflation data to be sure that the disinflationary trend isn't fleeting. On a six-month annualized basis, core PCE inflation is running at a 1.86% annualized rate, slightly below the Fed's 2% inflation target.
Over the past three months, core inflation is running at just a 1.5% annualized rate.
Personal Income, Spending
The PCE price index is released with the Commerce Department's monthly personal income and outlays report. Personal income rose 0.3% on the month, as expected. Personal consumption expenditures rose 0.7% in December, well above forecasts of a solid 0.4% rise.
Federal Reserve Rate Cut Odds Grow
After the December PCE report, market pricing showed 47% odds that the first rate cut will come at the March 20 meeting. That was up from 41% on Wednesday, before Thursday's Q4 GDP report, which showed core PCE inflation rising at a 2% annualized rate for the second straight quarter.
Coming as GDP grew a faster-than-expected 3.3%, the tame inflation data indicates that the economy is enjoying a pretty ideal combination of solid growth and declining inflation.
If the Federal Reserve doesn't cut in March, markets see overwhelming odds (90%) that it will happen on May 1. For the full year, markets are pricing in 85% odds of at least 1.25 percentage points in rate cuts, and a pretty good chance (53%) of an extra quarter-point reduction.
Supercore Inflation
Starting late in 2022, Federal Reserve chair Powell shifted the inflation focus to core PCE services excluding housing, or supercore services. That was in keeping with the Fed's view that the tight labor market and elevated wage growth had been at the root of stubbornly high inflation. Wages make up a high percentage of costs for service businesses. Therefore, supercore services inflation should ease as wage pressures moderate.
Prices for these core nonhousing services, including health care, haircuts and hospitality, rose 0.28% on the month, after tame gains of 0.14% and 0.11% the prior two months. Still, the 12-month supercore services inflation rate eased to 3.3% from 3.5% the prior month.
So far the disinflationary trend appears broad-based, giving assurance to the Fed that a snapback in price pressures is unlikely.
S&P 500, 10-Year Treasury Yield
The S&P 500 dipped 0.2% after the inflation data in Friday afternoon stock market action. The S&P 500 rose 0.5% on Thursday, notching its sixth straight gain and a new record closing high.
On Friday, the 10-year Treasury yield nudged higher on the strong consumption data, rising two basis point to 4.15%.
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