Key Inflation Gauge Cools Further, Paving Way for Smaller Fed Rate Hike

The Federal Reserve’s preferred inflation measures eased in December to the slowest annual paces in over a year while consumer spending fell, helping pave the way for policymakers to further scale back the pace of interest-rate hikes.

The personal consumption expenditures core price index, which excludes food and energy, rose 4.4% in December from a year earlier, Commerce Department data showed Friday. The overall gauge climbed 5% year-over-year, still well above the Fed’s 2% goal but both were the slowest paces since late 2021.

From a month earlier, the core gauge — which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading — was up 0.3%. The overall PCE price index increased 0.1%. Both were driven almost entirely by services as goods disinflation continued.

Personal spending, adjusted for changes in prices, dropped 0.3% in December. Inflation-adjusted outlays for merchandise fell 0.9%, while spending on services stagnated, the first month without an increase since January 2022.

The median estimates in a Bloomberg survey of economists were for a 0.3% advance in the core PCE price index and for no change in the overall measure on a monthly basis. The S&P 500 fluctuated as traders weighed corporate earnings while Treasury yields remained higher.