Consumers keep spending, while inflation edges higher.
Personal consumption expenditures (PCE) grew by a strong 0.7 percent in December, easily outstripping income growth of 0.4 percent and indicating that there were no signs of a slowdown in the biggest part of the US economy as the year ended. November data were revised a bit higher, reinforcing the notion of a solidly growing economy.
The overall PCE price index accelerated to a monthly gain of 0.3 percent (up from 0.1 percent) while the core rate (excluding the volatile food and energy components) rose by 0.2 percent (also higher than November’s 0.1 percent). On a 12-month trend basis, the overall PCE price index was up by 2.6 percent (up from 2.4 percent in November). The trend core PCE price index was unchanged from November at 2.8 percent. There are no signs of further inflation improvements in the December numbers. The inflation data were about as expected by financial markets.
Today’s data show that the economy was running at a solid pace at year-end, but inflation improvements have clearly leveled-off. With the Federal Reserve noting earlier this week at the January FOMC meeting that it was not easing at this time because trend inflation was not improving further (that is, moving closer to the Fed’s 2.0 percent long-term goal), the December Personal Income and Outlays report (and especially the inflation figures) suggest that the Fed’s pause will likely continue for a while. We should not expect further monetary policy easing until trend inflation moves lower again or the economy stumbles.
David W. Berson, Ph.D.
Chief US Economist
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