US Inflation Gauge Falls Below 3% for the First Time Since March 2021
In a surprising turn of events, the US inflation gauge has dropped below 3% for the first time since March 2021. This comes as a relief for many, especially considering the Federal Reserve’s recent rate-hiking campaign. The Personal Consumption Expenditures (PCE) index grew by 2.6% year-over-year in December, aligning with the previous month’s figures. However, the “core” PCE, which excludes the volatile food and energy categories, only grew by 2.9%, down from 3.2% in the previous month and below the expected 3.0% predicted by economists surveyed by Bloomberg.
The core PCE is the inflation measure that is most frequently mentioned by Federal Reserve Chair Jerome Powell. The fact that it has been running at an annualized pace in line with the Fed’s 2% target for the past seven months is significant. Andrew Hunter, the deputy chief US economist at Capital Economics, emphasized this point in a note to clients, stating that there is no longer any need to achieve further disinflation. He also noted that despite resilient economic growth, there is ample room for the Fed to start cutting interest rates soon.
This latest inflation data has fueled expectations that the central bank will indeed begin cutting interest rates after two years of hikes. During a December press conference, Powell mentioned that the Fed would want to reduce restrictions on the economy well before inflation reaches 2%. Jan Hatzius, the chief economist at Goldman Sachs, echoed this sentiment, stating that the disinflationary trend remains intact and is a key driver for rate cuts.
Market reactions have been swift, with traders now pricing in a roughly 50-50 chance of a rate cut in March, according to the CME FedWatch Tool. The Federal Reserve’s next decision on interest rates is scheduled for Wednesday, January 31st. It is clear that the December PCE reading aligns with the Consumer Price Index (CPI) for the same month, which also showed a cooling of core price increases. The CPI report revealed that core inflation was at 3.9%.
What makes these figures even more significant is the positive economic outlook in recent times. Fourth quarter economic growth surpassed expectations, and data from the S&P Flash PMI indicated that economic output reached its highest levels in seven months in January. This is a testament to the resilience of consumer spending and the stability of the labor market.
Overall, the drop in the US inflation gauge below 3% for the first time since March 2021 has sparked optimism among investors and economists. With the possibility of interest rate cuts on the horizon, the economy may experience a boost in the coming months. It remains to be seen how the Federal Reserve will respond to these developments, but one thing is certain – the focus on inflation and its impact on the economy will continue to be a key factor in shaping monetary policy decisions.