Morning Market Brief: January 30, 2024

Fed’s preferred inflation gauge stays elevated 

The US personal consumption expenditure price index (PCE) remained relatively elevated in December, signalling the battle against inflation isn’t over. Expectations have heightened that the US Federal Reserve Board (Fed) might begin lowering interest rates this year. However, the Fed has been quick to point out that inflation remains above its 2% target and is still a risk to its outlook. Compared to a year ago, however, inflation has moderated substantially, softening some pressure on US consumers. 

• The PCE was 2.6% year-over-year in December, in line with November’s reading and economists’ expectations. On a monthly basis, the PCE rose to 0.2% in December, after falling by 0.1% in November. December’s increase was due in part to a rise in energy prices.
• The PCE is a preferred inflation gauge of the Fed. The good news is that core PCE, which strips out more volatile items, eased to 2.9% year-over-year in December from 3.2% in November. Both headline and core measures have been creeping down to the Fed’s target, but there’s still much work to be done.
• One of the main drivers of inflation has been the strong US consumer. In December, personal spending rose by 0.7%. Personal spending hasn’t posted a monthly drop since March, which has helped prop up the US economy.
• The strong US consumer has come largely in response to a robust labour market, which has seen wages growing, adding to inflationary pressures. Personal income increased by 0.3% in December, benefiting from a rise in wages and salary, along with higher interest income.

Despite remaining elevated, the PCE came down markedly over 2023, likely setting the stage for the Fed to begin loosening its monetary policy. The Fed will make its first interest-rate announcement of 2024 on Wednesday, with economists expecting it to hold steady at 5.25%–5.50%. However, rate cuts later in the year appear likely.

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