(Bloomberg) -- The Federal Reserve's preferred inflation measures eased in December to the slowest annual paces in over a year while consumer spending fell, helping pave the way for policymakers to further scale back the pace of interest-rate hikes.
The personal consumption expenditures core price index, which excludes food and energy, rose 4.4% in December from a year earlier, Commerce Department data showed Friday. The overall gauge climbed 5% year-over-year, still well above the Fed’s 2% goal but both were the slowest paces since late 2021.
From a month earlier, the core gauge — which Fed Chair Jerome Powell has stressed is a more accurate measure of where inflation is heading — was up 0.3%. The overall PCE price index increased 0.1%. Both were driven almost entirely by services as goods disinflation continued.
Personal spending, adjusted for changes in prices, dropped 0.3% in December. Inflation-adjusted outlays for merchandise fell 0.9%, while spending on services stagnated, the first month without an increase since January 2022.
The median estimates in a Bloomberg survey of economists were for a 0.3% advance in the core PCE price index and for no change in the overall measure on a monthly basis. The S&P 500 fluctuated as traders weighed corporate earnings while Treasury yields remained higher.
The figures added to mounting evidence that the worst bout of inflation in a generation has passed as the Fed’s aggressive tightening campaign works its way through the economy. Officials are widely expected to once again slow the pace of rate hikes, to a quarter point next week, and will discuss how much higher they need to go to ensure prices are cooling for good.
Policymakers are adamant that their work isn’t yet done, as a tight labor market threatens to keep upward pressure on wages and prices. They also point to price growth in services excluding energy and housing, which ticked up slightly to 0.32% last month, according to Bloomberg calculations.
The Fed’s hawkish stance has many economists worried the central bank will go too far, assigning a 65% chance of a recession over the next year. Several officials still maintain that a soft landing is possible, a scenario in which inflation cools without a surge in unemployment.
What Bloomberg Economics Says...
“Despite a soft headline print for December’s personal consumption expenditure deflator, inflation remains heady in core services excluding housing rents... The lack of evidence that the durable inflation component is moderating means Powell will maintain his hawkish message of holding rates higher for longer.”
— Anna Wong, economist
The data showed that consumers lost momentum at the end of the year, weighed down by high prices and borrowing costs. Government data out Thursday showed gross domestic product rose at a stronger-than-expected 2.9% pace in the fourth quarter, but measures of underlying demand like consumer spending and business investment were relatively weak.
Americans, whose wages have lagged inflation throughout the pandemic, have been relying on credit cards and tapping into savings to support purchases. The saving rate rose to 3.4% in December, the biggest monthly increase since July 2021, the Commerce Department report showed.
The report showed a pullback in discretionary spending, particularly on categories like restaurants and hotel stays. On the goods side, purchases on apparel and footwear also dropped.
Personal income, unadjusted for inflation, as well as real disposable income, climbed 0.2% last month. Wages and salaries, unadjusted for prices, advanced 0.3% from November.
The Fed will get more data on the labor market next week, including the fourth-quarter employment cost index — a broad gauge of wages and benefits — as well as December job openings before the conclusion of its two-day meeting on Feb. 1. The January payrolls report will be released on Feb. 3.
Separate data Friday from the University of Michigan showed US inflation expectations continued to retreat in late January, helping boost consumer sentiment.
--With assistance from Chris Middleton and Reade Pickert.
(Updates with market open, adds Bloomberg Economics comment and consumer sentiment data)
