Key Inflation Measure Shows Drop Below 3% Annual Rate in December
People shop at a home improvement store in Brooklyn on Jan. 25, in New York City. The personal consumption expenditures price index rose 2% for the month in December.
Inflation as measured by the Federal Reserve’s preferred metric fell below a 3% annual rate in December, showing that price increases are steadily headed back to the central bank’s target, the Bureau of Economic Analysis reported on Friday.
The overall personal consumption expenditures price index rose 2% for the month, as did the core index that omits food and energy costs. Both were in line with estimates. On an annual basis, the overall index remained unchanged at 2.6% while the core fell to 2.9% from 3.2% in November.
The rise in the core index was the slowest since the spring of 2021. The core index is often cited by Fed officials as their barometer for inflation.
Personal income, meanwhile, grew by 0.3% in December, while spending rose by a strong 0.7%.
"The report showed steady income growth and good spending, together with the Fed’s preferred inflation measure finally falling below 3%,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Those are all ingredients for Fed cuts, regardless of December’s higher CPI inflation and strong retail spending."
The PCE release was followed by a stronger-than-expected report on gross domestic product for the fourth quarter, showing the economy grew 3.3% in the quarter—far above expectations for a 2% gain in both the overall and core index.
And it represents the last take on inflation data before the Federal Reserve holds its first meeting of 2024, starting on Tuesday. Recent inflation data has come along in line with trends showing it is on the way to approaching the Fed’s 2% annual target. That is encouraging to economists and markets as it heralds a lowering of rates by the central bank sometime this year.
“The recent string of positive economic surprises means the Federal Reserve will be in no rush to cut interest rates in the near-term and stick to a cautious approach,” Lydia Boussour, senior economist at EY, said ahead of the report. “But with the Fed’s favored inflation gauge – the core PCE deflator – likely to reach the critical 2.5% y/y threshold in the coming months, we anticipate 100bps of Fed rate cuts this year at the May, June, September and December meetings.”
Many observers will be watching what Fed Chairman Jerome Powell says in his press conference following the meeting for signs as to when the central bank may cut and how it continues reducing the assets on its balance sheet.
“We expect the January FOMC meeting to keep options open for future policy easing without committing to a particular timeline,” said Nomura Securities economists Nomura US Economists Aichi Amemiya, Jeremy Schwartz and Ruchir Sharma. “The meeting statement is likely to drop the hawkish bias from its forward guidance, but stop short of signaling rate cuts. The FOMC is likely to discuss adjusting the pace of balance sheet rundown at this meeting.”
The inflation data reflects two trends that are continuing to bring prices down. One is the disinflation in the goods sector, where prices spiked during the pandemic as people were shut in and buying goods online. The other is an easing in housing prices, especially apartment rents that soared also during the pandemic. High levels of construction of multi-family units have increased supply and, in turn, led to slowing of rents.
Zumper, an online rental site, found in its January survey that the median national rent for a one-bedroom home is $1,496 and the two-bedroom median is $1,847, both numbers that were flat over the past month. The one-bedroom rent is 1 percentage point lower than its peak in September.
More than 10,000 properties on Zumper are providing concessions like a month of free rent or waiving security deposits, the firm said.
“We’re seeing supply and demand switch places in real time,” said CEO Anthemos Georgiades. “Pandemic-fueled migrations have slowed just as new multifamily buildings are coming online in many markets. And, to top it off, winter is a slow season for moves, driving demand even lower. Renters have more leverage right now than anytime in recent memory.”
Adding to the good news Friday was a report from the National Association of Realtors showing that pending home sales increased 8.3% in December. Sales were strongest in the Midwest, South and West while they dipped in the Northeast.
Year over year, pending sales rose by 1.3%, according to the group.
“The housing market is off to a good start this year, as consumers benefit from falling mortgage rates and stable home prices,” said Lawrence Yun, NAR chief economist. “Job additions and income growth will further help with housing affordability, but increased supply will be essential to satisfying all potential demand.”