PCE, the Fed’s preferred inflation gauge, shows prices cooling

minneapolis
CNN
—

The trend is clear: inflation is cooling in the United States.

The Federal Reserve The preferred measure of inflation showed that price increases continued to moderate in November, providing another welcome indication that the period of painfully high prices has reached its peak.

The personal consumption expenditures, or PCE, price index rose 5.5% in November from a year earlier, the Commerce Department reported Friday. That’s lower than in October, when prices rose 6.1% annually.

In November alone, prices were up just 0.1% from October.

Core PCE, which excludes the volatile food and energy categories, rose 4.7% annually and 0.2% monthly, matching the expectations of economists surveyed by Refinitiv.

The annual increases in both PCE inflation indices reached their lowest levels since October 2021 and follow continued declines in other inflation indicators, such as the Consumer’s price index Y Producer Price Index.

PCE, specifically the core measure, is the Fed’s favorite inflation gauge, as it provides a more complete picture of costs to consumers.

Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending rose 0.1% in November from 0.8% the month before. Personal income increased 0.4% in November, compared to 0.7% in October.

The November PCE report, the last major inflation gauge released in 2022, provided a snapshot of a economy in transition. Tasked with reining in the highest inflation since the early 1980s, the Fed has undertaken a series of highly successful interest rate hikes to quell the demand.

In its seven meetings beginning in March, the central bank’s policy arm raised its benchmark interest rate by an accumulated of 4.25 percentage points. The sharp rise in rates has begun to filter through the economy, with its effects showing first in areas like real estate, where mortgage rates were 6.27% this week, more than double the rate seen last week. last year at this time, according to Freddie Mac. data.

“The economy is moving in the right direction from the Fed’s perspective at the end of 2022, but not fast enough,” Gus Faucher, chief economist at PNC Financial Services, said in a statement. “Higher interest rates are weighing on consumer spending, particularly on durable goods, and inflation is slowing.”

Inflation has eased in recent months, especially in items such as goods, as supply chain bottlenecks have eased and consumers have focused more spending on areas such as leisure and hospitality.

However, inflation within the service sector has been a bit “sticky” and has not abated as quickly. Friday’s PCE report showed the services index posted a 0.4% monthly increase, unchanged from October’s rate, and a year-on-year increase of more than 11%, Faucher said.

While much of the utility inflation is driven by rapidly reversing housing costs, the Fed is concerned that strong wage growth could fuel persistent increases in utility prices and inflation. generally added.

“The Federal Open Market Committee will continue to raise the federal funds rate in early 2023 until it becomes more apparent that the labor market is cooling and that wage growth and service inflation are slowing to faster rates. sustainable,” he added.

The The latest economic projections from the Fed Released last week showed board members expected inflation to stay slightly higher for longer than previously anticipated. Fed board members now expect PCE inflation to end 2023 at 3.1% and core PCE to end next year at 3.5%, above the central bank’s target rate of 2%.

A separate Commerce Department report released Friday showed new orders for manufactured goods fell 2.1% in November, the biggest monthly drop since the start of the pandemic.

Transportation equipment, specifically new orders for aircraft and non-defense parts, drove the decline, according to the report. Excluding transport, new orders increased by 0.2%.

Shipments increased 0.2% in November, which followed a 0.4% increase in October.

“Orders for core durable goods slowed but did not contract, reflecting growing unease about the economy,” said Diane Swonk, chief economist at KPMG, tweeted Friday after the report was released. “Manufacturing activity has started to contract and the preliminary reading for December suggests that it will contract further by the end of the year. A cold winter is expected for the manufacturing sector.

The slow downward march of inflation has also been good news for consumers, helping to buoy their economic sentiments during December, according to new data released Friday by the University of Michigan.

The final December reading for the Consumer Confidence Index came in at 59.7 in December, slightly above a preliminary measure of 59.1 and the final November reading of 56.8, according to data from the university’s Consumer Surveys.

“Consumers clearly welcomed the recent decline in inflation,” Joanne Hsu, director of Consumer Surveys, said in a statement. “While sentiment appears to have turned around from its all-time low in June, consumers have reserved judgment on whether trends will continue.”

She added: “Their outlook for the economy may have improved, but it remains relatively weak. The sustainability of strong consumer spending depends on the continued strength of income and labor markets in the coming quarters.”

The report showed the biggest improvement in sentiment on business conditions, while inflation expectations also improved, falling to 4.4% in December, the lowest reading in 18 months, according to the university. This is key data for the Federal Reserve. If consumers believe prices will stay high, that could influence wage demands to rise, which could cause companies to raise prices.

Earlier this week, the Conference Board Consumer Confidence Index – another measure of how consumers feel about the economy – landed at its highest measurement since April 2022.