The Fed's Inflation Measure is Getting Closer to Target! Will the Fed Accelerate Rate Cuts?


 An indicator used by the Federal Reserve to measure inflation was reported to have risen slightly in November and is moving closer to the central bank's target.

The core personal expenditure price index, which excludes volatile food and energy prices, rose 0.1% for the month, and rose 3.2% from a year earlier, according to a Commerce Department report on Friday.

Economists polled by Dow Jones had previously expected increases of 0.1% and 3.3%, respectively.

The report also reported that consumer spending in November rose by 0.3% while income rose by 0.4%, a figure in line with expectations and showing that spending continued despite continued inflationary pressures.

Including food and energy costs, headline PCE actually fell by 0.1% in the month and only increased by 2.6% from a year earlier, after peaking above 7% in mid-2022.

As you already know that the Fed is more inclined to the PCE indicator as a measure of inflation compared to the CPI which is more observed by market players. This is because the former focuses more on what consumers spend than the latter measures the cost of goods and services. Central banks are more concerned with core prices as an indicator of long-term inflation.

November's report reflected changes in consumer tastes, where prices of services rose by 0.2% while goods declined by 0.7%. A 2.7% drop in energy prices and a 0.1% drop in food prices helped contain inflation for the month.

Much of the market's focus recently has been on the Fed's view of inflation and how that will affect interest rates.

For each of its last meetings, the FOMC has maintained its position, keeping the overnight lending rate between 5.25% and 5.5%. At its meeting last week, the committee indicated that it has halted rate hikes and expects to implement a reduction of 0.75 percentage points in 2024. Markets expect the first rate cut to happen as early as March.