The Federal Reserve's preferred inflation gauge, the core personal consumption expenditures index, should show continued progress on the central bank's goal of 2% price growth when it's released Friday.
Economists surveyed by FactSet expect the index, which excludes more volatile food and energy costs, to rise by 3% year over year in December. On a month-over-month basis, economists estimate core PCE rose 0.2%.
The inflation picture looks promising. Over the final three months of 2023, core PCE registered 2% annualized growth for the second straight quarter, according to data released by the Bureau of Economic Analysis on Thursday.
In addition to progress on core, headline PCE inflation cooled 0.6 percentage points to 2.7% in the fourth quarter, the lowest pace of growth recorded since the first quarter of 2021.
Overall price pressures held steady in December, economists surveyed by FactSet predict, with headline PCE—which includes food and energy—forecast to have grown by 2.6% year over year, the same rate recorded in November.
After declining by 0.1% in November—the first outright decline since the onset of the Covid-19 pandemic in April 2020–economists predict headline PCE ticked up on a monthly basis by 0.2% in December.
Progress on disinflation comes even as the economy has expanded at a healthy clip, with real gross domestic product growing 3.3% in the fourth quarter. That growth was driven in large part by consumer spending that was bolstered by easing price pressures, a solid labor market, and resilient wage growth.
However, there are signs that economic growth will likely slow further. In the first half of this year, economists surveyed by FactSet expect GDP growth to slow to 0.8% in the first quarter and 0.6% in the second quarter. The personal savings rate fell to 4% in the fourth quarter, down from the 4.2% rate logged in the third quarter, an indication that some consumers are dipping into savings to fuel spending.
The continued disinflation coinciding with robust economic growth complicates the path forward for monetary policy. With growth so robust, cutting rates too quickly or too aggressively poses a significant risk of reigniting inflation.
The fourth quarter’s core PCE reading was confirmation of "job done" on reining in inflation, ING Chief International Economist James Knightley writes. He says the December PCE release should confirm that the month-over-month increase in prices is below the key 0.17% pace. That's the rate needed over 12 months to get the year-over-year core PCE reading to the 2% growth that the Fed is targeting.
“The Fed now has huge scope to cut rates,” Knightley says, adding that he believes Fed officials will wait a little longer to implement rate cuts to ensure they are “really, really confident they can afford to cut.”
EY Senior Economist Lydia Boussour says the recent string of upside surprises in economic data signals implies that Fed officials will be in “no rush to cut interest rates in the near-term and stick to a cautious approach.” She anticipates the Fed will cut its benchmark interest rate this year at its May, June, September, and December Federal Open Market Committee meetings by a total of 100 basis points (the equivalent of one percentage point).
The Bureau of Economic Analysis is scheduled to release PCE data at 8:30 a.m. Eastern time Friday.