ZAMONA Inflation Update: Fed’s Preferred Measure Climbs in December - What It Means for the Economy

Diccon Hyatt is a seasoned financial and economic journalist with extensive experience covering the pandemic-era economy. Over the past two years, he has authored numerous articles simplifying complex financial topics, focusing on how economic trends affect personal finances and markets. His previous work includes contributions to U.S. 1, Community News Service, and the Middletown Transcript.

Key Insights

• The Personal Consumption Expenditures (PCE) inflation rate increased to 2.6% year-over-year in December, up from 2.4% in November, aligning with expert forecasts.
• With the Federal Reserve’s target inflation rate of 2% becoming more elusive, officials show increased hesitation to reduce the central bank’s benchmark interest rate, which influences borrowing costs across various loan types.
• Core inflation, excluding volatile food and energy prices, remained steady in December, offering a cautiously optimistic view on inflation’s future path.

The Federal Reserve’s favored inflation gauge, the Personal Consumption Expenditures Index, rose by 2.6% annually in December, surpassing November’s 2.4%, according to the Bureau of Economic Analysis. This figure met economists’ expectations, as reflected in surveys by Dow Jones Newswires and The Wall Street Journal.

This persistent inflation trend mirrors findings from the Consumer Price Index, which also showed inflation steady above 2% in December, stabilizing after significant declines following the pandemic-driven surge in 2021 and 2022.

Implications for the Federal Reserve

Persistent inflation pressures have strained household budgets, increasing costs for essentials like food, fuel, and housing, while sustaining elevated borrowing costs. The Federal Reserve recently maintained the federal funds rate, keeping borrowing expenses high to temper economic activity and steer inflation toward its 2% annual target.

Notably, core inflation—which excludes fluctuating food and energy prices—held steady at 2.8% year-over-year in December, unchanged from November. Monthly core inflation edged up slightly by 0.2%, compared to 0.1% the previous month. Policymakers closely monitor core inflation as it reflects underlying price trends less influenced by short-term market volatility.

Economists agree that current inflation data do not warrant immediate changes to interest rate policies. The Fed’s cautious stance aims to balance economic growth with inflation control, awaiting clearer signs before adjusting rates.

Jochen Stanzl, Chief Market Analyst at CMC Markets, commented, "This data reinforces the Fed's cautious approach and the wisdom of a wait-and-see strategy regarding rate cuts."

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