Lighter than expected income, spending, and inflation.
While personal income and personal consumption expenditures (PCE) grew a bit more slowly than expected in November, but were still solid, the most important data in today’s release were PCE (and core PCE) inflation data that were a bit cooler than expected.
- The overall PCE price index rose by 0.1 percent in November, below market expectations of 0.2 percent. The core PCE price index (removing the volatile food and energy components) also climbed by 0.1 percent.
- Despite the slower monthly gains in PCE inflation, the 12-month trend rates moved a tick higher for the overall PCE (2.4 percent) and remained stable for the core (2.8 percent) because of difficult year-ago comparisons. The 3- and 6-month annualized growth rates for core PCE inflation were a bit slower, at 2.5 and 2.4 percent, respectively. All of these trend measures remain above the Fed’s long-term goal of 2.0 percent.
Coming immediately after the Federal Reserve eased monetary policy by 25 basis points, but reduced its expectations for cuts in 2025 to two (for a total of a further 50 basis points), what does this imply for Fed policy next year? That depends on whether the cooler monthly inflation figures are sustained, or if they move a bit higher again. The Separate Economic Projections (SEPs, or “dot plots”) in the latest FOMC release are forecasts, after all, and forecasts change as conditions change. The Fed will probably want to see if this slowing in monthly inflation continues before it changes its current view of monetary policy – suggesting that the Fed will pause its easing at the January FOMC meeting.
Beyond that, President-elect Trump’s plans to raise tariffs significantly could push inflation up some next year – but this is very uncertain, as the actual tariffs imposed, and their longevity, are far from certain today. The best view of underlying inflation comes from the inflation central-tendency measures – the median and trimmed-mean measures. They are telling us that underlying inflation is higher than the overall or core measures, but perhaps still moving a bit lower. Unless the labor market weakens sharply in the near-term, inflation concerns will probably keep the Fed from easing by much – suggesting that next year’s forecast of 50 basis points of further ease is reasonable as a starting point. But if solid economic growth continues into next year (and there are no real signs of slowing today), then the risks are tilted toward less easing. At this point, we can enjoy today’s report for slower PCE inflation, and hope that it continues into 2025 while economic growth remains sufficient to keep unemployment low.
David W. Berson, Ph.D.
Chief US Economist
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