US prices rise moderately in December, inflation trending lower

WASHINGTON – US prices rose moderately in December, keeping the annual increase in inflation below 3 per cent for a third straight month, which could allow the Federal Reserve to start cutting interest rates this year.

The personal consumption expenditures (PCE) price index increased 0.2 per cent in December 2023 after an unrevised 0.1 per cent drop in November, the Commerce Department’s Bureau of Economic Analysis said on Jan 26. In the 12 months through December, the PCE price index increased 2.6 per cent, matching November’s unrevised gain.

Economists polled by Reuters had forecast the PCE price index climbing 0.2 per cent on the month and rising 2.6 per cent year-on-year.

Excluding the volatile food and energy components, the PCE price index gained 0.2 per cent in December 2023 after rising 0.1 per cent in November. The so-called core PCE price index increased 2.9 per cent year-on-year, the smallest gain since March 2021, after rising 3.2 per cent in November. The Fed tracks the PCE price measures for its 2 per cent inflation target.

Monthly inflation readings of 0.2 per cent over time are necessary to bring inflation back to target, economists say.

The government reported on Jan 25 that core PCE inflation increased at a 2.0 per cent annualised rate in the fourth quarter after a similar rise in the July-September quarter. Though financial markets have pushed the probabilities of a March rate cut to below 50 per cent in a nod to the economy’s continued resilience, a reduction in borrowing costs is still expected by June.

The US central bank is expected to keep its policy rate unchanged at the current 5.25 per cent to 5.50 per cent range at its meeting next week. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.

Easing inflation is boosting household purchasing power, helping to drive consumer spending and the overall economy.

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 0.7 per cent in December 2023 after rising 0.4 per cent in November. When adjusted for inflation, overall consumer spending increased 0.5 per cent in December after a similar rise in the prior month.

The solid increase in the so-called real consumer spending puts consumption on a higher growth trajectory heading into the first quarter.

The data was included in the fourth quarter’s advance gross domestic product report published on Jan 25. Consumer spending increased at a strong 2.8 per cent rate last quarter, accounting for the bulk of the economy’s 3.3 per cent growth pace. REUTERS

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