December’s Personal Consumption Expenditures (PCE) showed that headline inflation rose 0.2% for the month, with the year-over-year reading holding steady at 2.6%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, also rose by 0.2% in December. The year-over-year reading fell from 3.2% to 2.9%, pushing this important metric below 3% for the first time in nearly three years!
What’s the bottom line? Inflation has made significant progress lower after peaking in 2022, with the headline reading at 2.6% (down from 7.1%) and the core reading at 2.9% (down from 5.6%). Plus, inflation is expected to decline even further this year, especially as some lagging components like falling shelter costs are better reflected in the reporting.
The Fed has been working hard to tame inflation, hiking its benchmark Fed Funds Rate (which is the overnight borrowing rate for banks) eleven times between March 2022 and July 2023. They did not hike at their September, November or December meetings, so they could continue to assess incoming inflation, labor sector and other economic data.
The Fed’s next meeting begins Tuesday and their Monetary Policy Statement and press conference on Wednesday could provide crucial hints regarding what’s ahead for rates this year.