Title: U.S. Inflation Cools Despite Strong Consumer Spending
The primary Federal Reserve inflation rate, as indicated by the core PCE price index, showed that price pressures cooled more than expected in December, according to recent data. This news comes as the S&P 500 experienced a slight dip in the stock market on Friday afternoon, following another record closing high the previous day.
The 12-month headline inflation rate remained steady at 2.6%, which is slightly below the predicted 2.7%. However, the core PCE price index increased as anticipated by 0.2% in December, aligning with forecasts. Nonetheless, the core 12-month inflation rate eased to 2.9% from November’s 3.2%.
Federal Reserve Chair Jerome Powell has emphasized the need for six months of stable inflation data to confirm that the disinflationary trend is not temporary. Currently, core PCE inflation is running slightly below the Fed’s 2% target, at a 1.86% annualized rate on a six-month basis. Over the past three months, core inflation stood at just a 1.5% annualized rate.
Despite inflation cooling, personal income rose by 0.3% in December, meeting expectations. Additionally, personal consumption expenditures exceeded forecasts by rising 0.7% during the same month, demonstrating strong consumer spending.
Market pricing indicates a 47% likelihood that the first rate cut will occur at the upcoming March 20 meeting. If the Federal Reserve does not make the cut in March, there is a 90% probability that it will occur on May 1. Furthermore, markets are currently pricing in an 85% chance of at least 1.25 percentage points in rate cuts for the year, with a 53% possibility of an additional quarter-point reduction.
To shed light on this issue, Federal Reserve Chair Powell has shifted the focus to core PCE services, excluding housing, referred to as supercore services.
Upon the release of the inflation data, the S&P 500 experienced a 0.2% decline in Friday afternoon stock market activity. However, the 10-year Treasury yield increased by two basis points to 4.15% due to the strong consumer spending figures.
The broad-based disinflationary trend provides reassurance to the Federal Reserve, as it indicates that a sudden surge in price pressures is unlikely to occur in the near future.
Overall, while inflation remains in check, consumer spending remains a strong driving force for the U.S. economy, and markets are anxiously awaiting the Federal Reserve’s decision on interest rate cuts in the coming months.
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