On a monthly basis, core inflation rose from 0.1% in November. However, the annual rate decreased from 3.2%. The 12-month rate is the lowest since March 2021.
Including volatile food and energy costs, headline inflation also rose 0.2% during the month and settled at 2.6% annually.
This statement adds to evidence that inflation, although still high, continues to make less progress, which could give the Fed the green light to start cutting interest rates later this year. The central bank targets 2% as a healthy annual inflation rate.
Markets paid little attention to the data, with stock futures showing only little change at the open and Treasury yields mostly lower.
“Inflation dynamics within the measure the Fed uses to formulate policy strongly suggest that the central bank will achieve its inflation target in the near term,” said Joseph Brusuelas, chief economist at RSM. “This will create the conditions in which it can happen [its] The policy pivots and begins a multi-year campaign in which the interest rate is lowered towards a range of 2.5% to 3%.
The Fed's benchmark overnight interest rate is currently targeting between 5.25%-5.5%.
With inflation nearing the Fed's target, consumer spending rose 0.7%, stronger than estimates of 0.5%. Personal income growth fell to 0.3%, in line with expectations.
Data indicate that consumers are turning to their savings to cover their expenses. The personal savings rate fell to 3.7% during the month, compared to 4.1% in November.
Among the inflation numbers, goods prices fell by 0.2% while services prices rose by 0.3%, reversing the trend when inflation started to rise. As the pandemic forced people to stay home longer, demand for goods surged, adding to supply chain problems and exacerbating price increases.
Food prices rose by 0.1% on a monthly basis, while prices for energy goods and services rose by 0.3%. Prices for long-lasting durable goods such as appliances, computers and vehicles fell 0.4%.
Given a separate report on Thursday showing that gross domestic product grew at a much faster-than-expected 3.3% pace in the fourth quarter, the latest round of data shows the economy expanding and inflation at least returning to Fed levels. Annual target 2%
“It is difficult to say which is more straightforward: that GDP growth accelerated last year in the wake of the Fed’s most aggressive tightening campaign in decades, or that core inflation nonetheless fell to the 2% annualized target over The second half of the year,” wrote Andrew Hunter, deputy chief US economist at Capital Economics.
“Either way, it's time for Fed officials to take advantage of the gains and start tapering down policy soon,” he added.
While the general public closely follows the Labor Department's Consumer Price Index, Federal Reserve policymakers prefer the Personal Consumption Expenditures Index because it adjusts to shifts in what consumers actually buy, while the CPI measures prices in the market.
Inflation has been a nagging issue since the early days of the Covid pandemic, when prices rose to their highest levels since the early 1980s. The Fed initially expected the acceleration to be temporary, then responded with a series of interest rate hikes that took its benchmark interest rate to its highest levels in more than 22 years.
Now, with inflation slowing, markets largely expect the Fed to start pulling back on its policy tightening. As of Friday morning, futures traders were assigning a roughly 53% chance that the Fed would issue its first rate cut of this cycle in March, according to CME Group data. Pricing points to decline six quarter percentage points this year.
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