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HomeFinancial AdvisorFed's Preferred Inflation Gauges Cool, Reinforcing Rate-Cut Tilt

Fed’s Preferred Inflation Gauges Cool, Reinforcing Rate-Cut Tilt

The Federal Reserve’s preferred gauge of underlying inflation barely rose in November and trailed policymakers’ 2% target in a six-month 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%, just below the Fed’s target. Treasury yields pared declines after the data, while S&P 500 futures were little changed.

Friday’s report also showed personal spending, adjusted for changes in prices, rose 0.3% after a downwardly revised 0.1% advance in October.

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.

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 signaled 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.

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.



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