The Federal Reserve’s preferred inflation gauge showed muted gains in December, reinforcing expectations that interest rate cuts could proceed in 2025. The core personal consumption expenditures (PCE) price index, which excludes volatile food and energy prices, rose 0.2% from the prior month and 2.8% year over year, aligning with forecasts. Despite this, real disposable income barely increased for a second consecutive month, and the personal saving rate fell to 3.8%, its lowest level in two years, highlighting growing financial stress among consumers.
On a three-month annualized basis, core PCE inflation slowed to 2.2%, marking its weakest pace since July. Fed officials, including Chair Jerome Powell, have reiterated the need for more progress toward the 2% inflation target before easing policy further. Powell also noted lingering uncertainties surrounding President Donald Trump’s trade policies, including proposed tariffs, which could impact inflation and economic growth. Stock futures held gains while Treasury yields fluctuated following the release, signaling that markets remain optimistic about a gradual policy shift.
Market Overview:- Core PCE rose 0.2% in December, matching expectations
- Personal savings rate dropped to 3.8%, a two-year low
- Consumer spending remained strong despite income stagnation
- Three-month annualized core PCE inflation slowed to 2.2%
- Fed remains cautious on rate cuts, citing economic uncertainties
- Market-based core PCE index rose 0.1% month-over-month
- Will slowing inflation be enough for the Fed to cut rates?
- How will Trump’s proposed tariffs impact price stability?
- Upcoming job growth revisions could influence Fed policy
- The core PCE inflation gauge rose just 0.2% month-over-month and 2.8% year-over-year in December, reinforcing expectations that inflation is steadily moderating toward the Federal Reserve’s 2% target.
- On a three-month annualized basis, core PCE inflation slowed to 2.2%, its weakest pace since July, signaling that the Fed’s monetary tightening efforts are yielding results and could pave the way for rate cuts in 2025.
- Consumer spending surged by 0.4% in December, supported by resilient household demand despite higher borrowing costs, showcasing the strength of the U.S. economy heading into 2025.
- Labor costs rose at their slowest pace since 2021, further easing inflationary pressures and providing additional room for the Fed to consider loosening monetary policy later this year.
- Stock futures held gains following the inflation report, reflecting market optimism about a potential policy shift and a softer landing for the economy.
- The personal savings rate fell to 3.8%, its lowest level in two years, highlighting growing financial stress among consumers and raising concerns about the sustainability of current spending levels.
- Real disposable income barely increased for the second consecutive month, suggesting that wage growth is not keeping pace with inflation, which could weigh on consumer confidence and future spending.
- Fed Chair Jerome Powell reiterated that more progress is needed to reach the 2% inflation target, signaling that rate cuts may not occur as quickly as markets hope, prolonging tighter financial conditions.
- President Trump’s proposed tariffs on goods from Canada and Mexico could introduce new inflationary pressures, complicating the Fed’s efforts to stabilize prices and potentially slowing economic growth.
- Uncertainty surrounding upcoming revisions to job growth data and key inflation metrics could reshape market expectations and delay any decisive policy action by the Fed.
Consumer spending surged 0.4% in December after an upward revision to prior months, signaling continued resilience despite higher borrowing costs. Economists suspect that households may be front-loading purchases in anticipation of potential price increases tied to Trump’s tariff proposals. Meanwhile, labor costs rose at their slowest pace since 2021, providing another sign that inflationary pressures may be easing.
With fourth-quarter GDP expanding at a 2.3% annualized rate, the U.S. economy remains on solid footing. However, policymakers are closely monitoring new seasonal adjustments to key inflation metrics, including the consumer price index (CPI), which will be released in the coming weeks. Any significant revisions could reshape expectations for the Fed’s policy trajectory in 2025.
