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PCE, the Fed's preferred inflation gauge, shows prices cooling down

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The trend is clear: inflation is cooling in the United States.

The Federal Reserve’s preferred measure of inflation showed that price increases remained moderate in November, providing another welcome indication that the period of painfully high prices has peaked.

The Personal Consumption Expenditure, or PCE, price index rose 5.5% in November from a year earlier, the Commerce Department said on Friday. That’s lower than in October, when prices rose 6.1% a year.

In November alone, prices rose by just 0.1% compared to October.

Core PCE, which excludes the volatile food and energy categories, rose 4.7% year-on-year and 0.2% monthly, matching the expectations of economists polled by Refinitiv.

The annual increases for both PCE inflation indices reached their lowest levels since October 2021 and follow continued declines in other inflation indicators such as the Consumer Price Index and the Producer Price Index.

The PCE, specifically the leading measure, is the Fed’s preferred inflation gauge as it provides a more complete picture of costs to consumers.

Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending increased by 0.1% in November, compared with 0.8% in the previous month. Personal income increased by 0.4% in November, compared to 0.7% in October.

The November PCE report, the last major inflation indicator released in 2022, provided a snapshot of an economy in transition. Tasked with containing the highest inflation since the early 1980s, the Fed undertook a series of highly successful rate hikes to stifle demand.

At its seven meetings beginning in March, the central bank’s policy-making arm raised its benchmark interest rate by a cumulative 4.25 percentage points. The sharp rise in rates has begun to ripple through the economy, its effects showing first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to with Freddie Mac data.

“The economy is moving in the right direction from the Federal Reserve’s outlook towards the end of 2022, but not fast enough,” Gus Faucher, chief economist at PNC Financial Services, said in a statement. “Higher interest rates are weighing on consumer spending, particularly for durable goods, and inflation is slowing.”

Inflation has moderated in recent months, especially in items such as goods, as supply chain bottlenecks have eased and consumers have concentrated more spending on areas such as leisure and hospitality.

However, service sector inflation has been a bit “sticky” and is not coming down as quickly. Friday’s PCE report showed that the services index posted a monthly increase of 0.4% – unchanged from the October rate – and a year-on-year increase of more than 11%, Faucher noted.

While much of services inflation is due to housing costs, which are rapidly reversing, the Fed is concerned that strong wage growth could fuel persistent increases in services prices and overall inflation, he added.

“The Federal Open Market Committee will continue to raise the federal funds rate in early 2023 until it becomes more evident that the job market is cooling off and wage growth and services inflation are slowing to more sustainable paces,” he added. .

The Fed’s latest economic projections, released last week, showed that board members expected inflation to remain slightly higher for longer than previously anticipated. Fed board members now expect PCE inflation to end 2023 at 3.1% and core PCE to end next year at 3.5%, above the central bank’s 2% target.

A separate Commerce Department report released on Friday showed that new orders for manufactured goods fell 2.1% in November, the biggest monthly drop since the start of the pandemic.

Transport equipment, specifically new orders for aircraft and non-military parts, drove the decline, according to the report. Excluding transport, new orders increased by 0.2%.

Shipments increased by 0.2% in November, after increasing by 0.4% in October.

“Key durable goods orders slowed but did not contract, reflecting growing unease with the economy,” Diane Swonk, chief economist at KPMG, tweeted Friday after the release of the report. “Manufacturing activity has started to contract and the December preliminary reading suggests it will contract further towards the end of the year. A cold winter is expected for the manufacturing sector.

A person carrying shopping bags in New York City, New York on December 14.  Consumer sentiment improved in December as inflation fell, but Americans remain pessimistic about the broader economy, new data from the University of Michigan showed.

The slow downward march of inflation was also good news for consumers, helping to bolster their economic sentiments in December, according to new data released Friday by the University of Michigan.

The final December reading for the Consumer Sentiment Index came in at 59.7 in December, up slightly from a preliminary measurement of 59.1 and the final November reading of 56.8, according to Consumer Survey data. from the university.

“Consumers have clearly welcomed the recent reduction in inflation,” Joanne Hsu, director of Surveys of Consumers, said in a statement. “While sentiment appears to have surpassed its all-time low since June, consumers have reserved judgment on whether the trends will continue.”

She added: “Its outlook for the economy may have improved, but it remains relatively poor. The sustainability of robust consumer spending depends on the continued strength of income and labor markets in the coming quarters.”

The report showed the biggest improvement in sentiment about business conditions, while inflation expectations also improved as it fell to 4.4% in December, the lowest reading in 18 months, according to the university. This is a key data point for the Federal Reserve. If consumers believe that prices will remain high, this can lead to increased wage demands, which can prompt companies to raise prices.

Earlier this week, the Conference Board’s Consumer Confidence Index – another measure of how consumers are feeling about the economy – reached its highest measurement since April 2022.