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The latest personal consumption expenditures (PCE) report shows a monthly increase of 0.2%. Core PCE, the Federal Reserve’s favorite inflation gauge, rose in line with economists’ expectations, potentially signaling an opportunity to begin reducing interest rates earlier than anticipated.
 

December Core PCE Up 2.9% Year-Over-Year

The latest data from the Commerce Department revealed a notable easing in inflation towards the end of 2023. 

The department’s personal consumption expenditures (PCE) price index for December, a critical inflation metric watched by the Federal Reserve, showed a modest monthly increase of 0.2% and a year-over-year rise of 2.9% when food and energy are excluded. These figures align closely with the projections of economists surveyed by Dow Jones, who anticipated increases of 0.2% monthly and 3% annually.

This report marks a slight uptick in core inflation on a monthly basis, rising from 0.1% in November, but a decrease in the annual rate, dropping from 3.2% to its lowest since February 2021. 

When including the volatile costs of food and energy, the overall inflation also recorded a 0.2% rise for December, maintaining an annual rate of 2.6%. The latter marks the lowest level since February 2021. 
 

What Does this Mean for a Soft Landing?

The new PCE data comes a day after the Commerce Department released the most recent gross domestic product (GDP) data, which showed that the US economy witnessed a 3.3% annual growth in Q4. The expansion is lower than the 4.9% reported in the previous quarter, though still above economists’ expectations. 

During 2023, real GDP grew 2.5%, compared to the consensus projection of 2.4% and the 1.9% seen in 2022. 

The latest economic data released this week suggests a continued, albeit gradual, decline in inflation alongside ongoing resilience in the US economy. This combination is boosting prospects for the Federal Reserve to begin reducing interest rates early and the much-debated “soft landing.”

Per the CME’s Fed Watch Tool, the probability of the Fed reducing rates to between 5% and 5.25% at its March meeting is approximately 46%. For the meeting scheduled on May 1, the likelihood of such a rate cut is slightly higher, at 51.3%.

In the wake of PCE data, the market response was relatively muted. Stock futures showed little movement at the opening, and Treasury yields were mainly in the red. 

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