PCE, the Fed’s preferred inflation gauge, shows prices cooling

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The trend is clear. Inflation is calming down in America.

The Federal Reserve’s favorable inflation measurement shows inflation to remain modest in November, another welcome sign that a period of painfully high prices has peaked. .

The Personal Consumption Expenditure Price Index (PCE) rose 5.5% in November from a year earlier, the Department of Commerce reported Friday.

In November alone, prices were up just 0.1% from October.

Core PCE, which excludes the volatile food and energy categories, rose 4.7% annually, or 0.2% on a monthly basis, in line with expectations of economists surveyed by Refinitiv.

The annual rate of increase in both PCE inflation indices hit their lowest level since October 2021, following continued declines in other inflation measures such as the consumer price index and producer price index.

The PCE, especially the core measure, is the Fed’s favorite inflation gauge because it gives a more complete picture of consumer costs.

Friday’s report also showed that spending continued to grow in November, but at a much slower pace than the previous month. did. Personal income he increased by 0.4% in November and fell from 0.7% in October.

The November PCE report, the last major inflation indicator to be released in 2022, provided a snapshot of the economy in transition. Tasked with taming inflation to its highest level since the early 1980s, his Fed has embarked on a series of massive rate hikes to keep demand down.

The central bank’s policy-making department has raised the base rate by a cumulative 4.25 percentage points in seven meetings starting in March. The sharp rise in interest rates is starting to seep into the economy, with the impact first appearing in areas such as real estate, where mortgage rates this week were 6.27%, more than double last year’s so far, according to Freddie Mac. data.

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

Inflation has eased in recent months, especially in items such as merchandise, as supply chain bottlenecks ease and consumers focus more spending on areas such as leisure and hospitality.

However, service sector inflation was somewhat ‘sticky’ and did not subside quickly. The services index rose 0.4% month-on-month, unchanged from October and up more than 11% year-on-year, Faucher said, according to his PCE report on Friday.

Much of the service inflation is driven by rapidly reversing housing costs, but the Fed is concerned that strong wage growth could drive a sustained rise in service prices and overall inflation. he added.

“The Federal Open Market Commission will continue to raise Federal Funds rates in early 2023 until the job market cools and it becomes clear that wage growth and services inflation are slowing to a more sustainable pace. “Wow,” he added.

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

A separate Commerce Department report released on Friday said new orders for manufactured goods fell 2.1% in November, the biggest monthly decline since the outbreak of the pandemic.

New orders for transport equipment, especially non-defense aircraft and parts, caused the decline, according to the report. New orders excluding transportation increased by 0.2%.

Shipments increased 0.2% in November, following a 0.4% increase in October.

Diane Swonk, chief economist at KPMG, said: “Orders for key durable goods slowed, but did not decline, reflecting growing concerns about the economy.” murmured Friday after the release of the report. “Manufacturing activity has started to contract, and preliminary readings for December suggest a further contraction by the end of the year. A cold winter is expected for manufacturing.

A gradual decline in inflation is also welcome news for consumers, helping to fuel economic sentiment in December, according to new data released Friday by the University of Michigan.

Data from the university’s consumer survey showed that the December final reading of the Consumer Sentiment Index was 59.7, up slightly from the preliminary reading of 59.1 and the November final reading of 56.8.

“Consumers have clearly welcomed the recent easing in inflation,” said Joan Hsu, director of consumer research, in a statement. “Sentiment appears to have flipped from its lowest level since June, but consumers are reserving judgment as to whether the trend will continue.”

She added: The sustainability of robust consumer spending will depend on continued strength in income and labor markets in the coming quarters. ”

The report showed the biggest improvement in sentiment on the business environment, but inflation expectations also fell to 4.4% in December, the lowest reading in 18 months, according to the university. This is an important data point for the Federal Reserve. If consumers believe that prices will remain high, that could lead to an increase in wage demand, which could lead businesses to raise prices.

Earlier this week, the Conference Board’s Consumer Confidence Index, another measure of how consumers feel about the economy, landed at its highest reading since April 2022.

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