WASHINGTON- US prices rose marginally in December, keeping the annual increase in inflation below 3 percent for a third straight month, bolstering expectations that the Federal Reserve will start cutting interest rates this year.
But the timing of the anticipated rate cut is uncertain, with the report from the Commerce Department on Friday also showing consumer spending surging at the end of 2023 as Americans splurged on goods and services over the holidays.
Financial markets have pushed the odds of a March rate cut to below 50 percent in a nod to the economy’s continued resilience. The US central bank is expected to keep its policy rate unchanged at the current 5.25 percent -5.50 percent range at its meeting next week.
“The inflation trajectory is improving, giving the Fed leeway to cut rates this year,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “However, the Fed has further work to do and should not be tempted to declare ‘mission accomplished.’”
The personal consumption expenditures (PCE) price index increased 0.2 percent last month after dropping 0.1 percent in November, the Commerce Department’s Bureau of Economic Analysis said. Food prices rose 0.1 percent and the cost of energy products increased 0.3 percent.
In the 12 months through December, the PCE price index advanced 2.6 percent , matching November’s gain. The inflation readings were in line with economists’ expectations.
Excluding the volatile food and energy components, the PCE price index climbed 0.2 percent after rising 0.1 percent in November. The so-called core PCE price index increased 2.9 percent year-on-year, the smallest gain since March 2021, after rising 3.2 percent in November.
The Fed tracks the PCE price measures for its 2 percent inflation target. Monthly inflation readings of 0.2 percent over time are necessary to bring inflation back to target.
Core services prices excluding housing, the primary concern for policymakers, rose 0.3 percent . They increased 3.3 percent year-on-year after advancing 3.5 percent in November.
Some economists argue that core inflation is already on target. Measured on an annualized basis, core inflation rose at a 1.5 percent rate over the past three months and increased at a 1.9 percent pace in the last six months. The government reported on Thursday that core PCE inflation advanced at a 2.0 percent rate in the fourth quarter after a similar rise in the July-September period.
Economists said Fed officials were likely to place more weight on the fourth-quarter inflation reading as the quarterly data ironed out month-to-month volatility.
“Inflation at 2.0 percent on a quarter-on-quarter basis, for two quarters in a row, is a good reason to start cutting rates,” said Chris Low, chief economist at FHN Financial in New York. “The year-on-year core CPI at 2.9 percent gives the Fed cover to wait a few months longer and still fulfill (Chair Jerome) Powell’s prediction the Fed will cut rates before inflation reaches 2 percent .”
Stocks on Wall Street were mixed. The dollar slipped against a basket of currencies. US Treasury prices fell.
