Inflation wrapped up 2024 on a notable upswing, as the personal consumption expenditures (PCE) price index, which is closely monitored by the Federal Reserve, increased to 2.6% on a year-over-year basis for December, according to the Commerce Department's report released on Friday. This reading not only aligns with the Dow Jones estimate but also reveals a 0.2 percentage point rise from the previous month.
When excluding the often volatile categories of food and energy, core PCE registered at 2.8% for December, consistent with expectations and marking no change from November's figures. On a monthly basis, the PCE index rose by 0.3%, matching the forecasts, and core PCE saw a modest increase of 0.2%. Despite these figures being within the anticipated range, they highlight just how far inflation remains above the Federal Reserve's target rate of 2%. This is a level not observed since February 2021.
Food prices during December saw only a slight increase of 0.2%, meanwhile, energy costs surged by 2.7%. Interestingly, durable goods prices—encompassing items like aircraft and electronics—experienced deflation, decreasing by 0.4%. Contrarily, the prices of nondurable goods saw an increase of 0.5%.
These figures come on the heels of the Federal Reserve's recent decision to maintain its key interest rate between 4.25% and 4.5%, marking a pause after three consecutive rate cuts totaling one full percentage point. "Inflation is still firmly above the Federal Reserve's 2% target. While Friday's PCE print was in line with expectations, the data shows inflation remained elevated to end 2024, making it somewhat ironic the Federal Reserve cut interest rates during the same month," remarked Clark Bellin, the chief investment officer at Bellwether Wealth.
On the same note, Federal Reserve Governor Michelle Bowman expressed hope for inflation to decelerate through 2025 and emphasized the need for the central bank to remain cautious. "There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to see progress in lowering inflation resume before we make any adjustments to the target range," Bowman stated during address to business leaders Thursday.
Bowman's sentiments echo the perspective of many economists, who anticipate inflation to begin declining again, potentially ending the year lower than its current standing. The latest report also indicated personal income growth of 0.4% for December, meeting projections, and consumer spending rose by 0.7%, surpassing expectations by one-tenth of a percentage point.
Meanwhile, the Bureau of Labor Statistics reported the employment cost index rose by 0.9% for the fourth quarter of 2024, aligning with forecasts but marginally surpassing the previous quarter's figures. Annually, the employment cost index saw an increase of 3.8%, narrowly below the 3.9% recorded for the third quarter.
The inflation trends highlighted by the December PCE report are imperative as they provide insights on consumer behavior amid fluctuated costs. It becomes increasingly apparent how persistent inflation impacts decision-making at the Federal Reserve.
Jerome Powell, the Fed Chairman, reaffirmed this at the Fed's most recent meeting, emphasizing the importance of returning to the 2% target sustainably. "We seem to be set up for continued progress, but being set up for it is one thing, having it is another," he cautioned, reminding investors and economists alike of the challenges remaining on the path to meaningful reduction.
Experts predict the core PCE inflation, which serves as the Fed's preferred gauge, will continue to remain above the 2.5% threshold, having marked its 46th consecutive month above this benchmark. This consistency indicates sustained inflationary pressures, especially when compared to the relative stability experienced from 2008 to 2020, where core PCE inflation was below 2.3%.
Looking forward, predictions surrounding inflation vary, with the Fed projecting slow advances toward its 2% goal—with estimates of 2.5% core PCE by the end of 2025 and progressively nearing the target by 2027. On the other hand, Goldman Sachs economists forecast slightly lower expectations, citing 2.4% inflation for this year, up from previous estimates due to expected tariff impacts.
The December PCE report has showcased the balancing act the Fed faces as it navigates monetary policy amid persistent inflation. With expectations for inflation to decline yet to materialize, market participants remain attentive to the Fed's actions going forward.
The latest updates substantiate the intricacies of economic assessments as the Federal Reserve continues to approach the significant challenge of recalibrated interest rates, mindful of their ultimate goal—achieving sustained price stability.