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The Fed’s Favorite Inflation Gauge Shows Rise in November

9 Min Read
PCE Inflation

The Federal Reserve closely monitors various indicators to assess the state of the economy and make informed decisions regarding monetary policy. One such indicator is the core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices. In November, this gauge rose slightly, edging closer to the central bank’s inflation target.

Key Findings

  • The core PCE price index increased by 0.1% in November, in line with economists’ expectations.
  • On a year-over-year basis, the index was up 3.2%, slightly lower than the projected increase of 3.3%.
  • Over a six-month period, core PCE increased by 1.9%, indicating that the Federal Reserve may soon reach its inflation goal.
  • Including food and energy costs, the headline PCE fell 0.1% on the month and was up 2.6% from a year ago.
  • The Federal Open Market Committee (FOMC) remains cautious but optimistic about inflation, considering the recent slowdown in core inflation.

Analyzing the Core PCE Price Index

The core PCE price index is a preferred measure of inflation for the Federal Reserve. Unlike the more widely followed consumer price index (CPI), which focuses on the cost of goods and services, the core PCE index emphasizes what consumers actually spend. This distinction gives a more accurate reflection of inflationary pressures on the economy.

In November, the core PCE price index rose by 0.1%, indicating a moderate increase in prices. However, this was slightly lower than the projected rise of 0.1% and the year-over-year increase of 3.2% fell short of the anticipated 3.3%. Despite these small deviations, the index continues to move closer to the central bank’s target.

Implications for Monetary Policy

The Federal Reserve has a dual mandate to achieve maximum employment and price stability. As part of its price stability objective, the central bank aims for an annual inflation rate of 2%. The recent increase in the core PCE price index, albeit modest, suggests progress towards this target.

Economists and market watchers are interested in the Federal Reserve’s interpretation of inflation data, as it influences monetary policy decisions. The FOMC, in its last meeting, signaled that it is pausing its rate hikes and expects to implement rate cuts totaling 0.75 percentage point in 2024. The timing of these reductions will depend on the core PCE numbers over the next few months.

Market Reactions and Outlook

The financial markets had a muted response to the core PCE price index report, with Wall Street set for a mixed open on the last session before the Christmas holiday. This lack of significant market movement suggests that investors were not surprised by the inflation data.

Moving forward, economists and investors will closely monitor inflation indicators to gauge the Federal Reserve’s actions. If core PCE numbers continue to show a slowdown in inflation, it could open the possibility of rate cuts in 2024. However, the timing and extent of these cuts will depend on the trajectory of inflation and other economic factors.

Consumer Expenditures and Income

Alongside the core PCE price index, the report also highlighted consumer expenditures and income figures for November. Consumer expenditures climbed by 0.3%, indicating that spending remains robust despite ongoing inflation pressures. Income also increased by 0.4%, in line with expectations.

The combination of increased consumer spending and income growth suggests a healthy level of economic activity. It demonstrates that individuals and households are continuing to spend, despite rising prices and inflation concerns.

Goods and Services Price Movements

The November report also shed light on the price movements of goods and services. Services prices increased by 0.2%, indicating a slight uptick in costs for non-tangible offerings. In contrast, goods prices slumped by 0.7%, reflecting a decline in the cost of tangible products.

Energy prices experienced a significant slide of 2.7%, contributing to the overall decrease in headline PCE. Additionally, food prices decreased by 0.1% during the month. These declines in energy and food costs played a role in mitigating inflationary pressures in November.

Long-Term Inflation Outlook

Although the headline PCE, which includes food and energy prices, fell slightly in November, the 12-month numbers reveal a positive trend towards the Federal Reserve’s inflation target. The headline PCE was up 2.6% from a year ago, marking a significant decrease from the peak above 7% in mid-2022.

Economists and experts anticipate that the annual inflation rate will return to the 2% target over the coming months. The expected further slowdown in rent inflation, coupled with the progress seen in core PCE, supports this outlook.

See first source: CNBC

FAQ

1. What is the core PCE price index, and why is it important?

The core PCE price index is an inflation indicator used by the Federal Reserve to assess price stability in the economy. It excludes volatile food and energy prices, providing a more accurate reflection of inflationary pressures on consumer spending.

2. What were the key findings from the recent core PCE price index report for November?

  • The core PCE price index increased by 0.1% in November, matching economists’ expectations.
  • On a year-over-year basis, the index was up 3.2%, slightly below the projected increase of 3.3%.
  • Over a six-month period, core PCE increased by 1.9%, indicating progress toward the Federal Reserve’s inflation target

3. How does the core PCE price index differ from the consumer price index (CPI)?

The core PCE index focuses on what consumers actually spend, making it different from the CPI, which measures the cost of goods and services. This distinction makes the core PCE a preferred measure for the Federal Reserve.

4. What are the implications of the recent core PCE price index data for monetary policy?

The modest increase in the core PCE price index suggests progress toward the Federal Reserve’s 2% inflation target. The Federal Open Market Committee (FOMC) signaled a pause in rate hikes and expects rate cuts in 2024, with the timing dependent on core PCE data in the coming months.

5. How did financial markets react to the core PCE price index report?

Financial markets had a muted response to the report, with Wall Street showing a mixed open. This suggests that investors were not surprised by the inflation data.

6. What will economists and investors be monitoring in the future regarding inflation indicators?

Economists and investors will closely monitor inflation indicators, including core PCE, to gauge the Federal Reserve’s actions. Continued slowdown in inflation could open the possibility of rate cuts in 2024, with timing and extent depending on economic factors.

7. What other economic indicators were highlighted in the report for November?

The report also included consumer expenditures and income figures for November. Consumer expenditures increased by 0.3%, and income grew by 0.4%, indicating robust spending and income growth despite inflation pressures.

8. What were the price movements of goods and services in November?

Services prices increased by 0.2%, while goods prices slumped by 0.7%. Energy prices decreased by 2.7%, and food prices decreased by 0.1%, contributing to the overall decline in the headline PCE.

9. What is the long-term inflation outlook based on the headline PCE?

The headline PCE, including food and energy prices, fell slightly in November but showed a positive trend toward the Federal Reserve’s 2% inflation target on a year-over-year basis. Experts anticipate the annual inflation rate will return to the target over the coming months, supported by progress in core PCE and rent inflation slowdown.

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Cassandra has been reporting on the successes and failures of small businesses after she started a lucrative small business in college. Besides writing, she enjoys flying drones, playing board games, and skiiing.