Fed’s preferred inflation gauge falls below 3% for first time since March 2021

The Fed’s preferred inflation gauge has moved below 3% for the first time since March 2021, before the start of the central bank’s rate-hiking campaign.

The Personal Consumption Expenditures (PCE) index grew 2.6% year-over-year in December, in line with last month’s print. “Core” PCE, which excludes the volatile food and energy categories, grew 2.9%, down from 3.2% from the month prior and below the 3.0% economists surveyed by Bloomberg had expected.

Core PCE is the inflation measure mentioned most often by Fed Chair Jerome Powell.

Month-over-month, core PCE rose 0.2% in December, up from 0.1% in November. Importantly, annualized core PCE over the last three and six months is now below the Fed’s 2% target.

“Core PCE inflation has been running at an annualized pace in line with the Fed’s 2% target for seven months now,” Capital Economics deputy chief US economist Andrew Hunter said in a note to clients. “This reiterates the message that there isn’t really any ‘last mile’ of disinflation still to achieve and that, even with real economic growth still resilient, there is plenty of scope for the Fed to start cutting interest rates soon.”

The inflation data could fuel expectations that the central bank will soon start cutting interest rates after two years of hikes. During the December Fed press conference, Powell told Yahoo Finance’s Jennifer Schonberger that the Fed would want to be “reducing restriction on the economy” well before inflation hits 2%.

“Ultimately, the driver of rate cuts in my view is what happens to inflation,” Goldman Sachs chief economist Jan Hatzius told Yahoo Finance Live on Jan. 17. “And the disinflationary trend cutting through the monthly ups and downs, that’s still very much intact.”

Entering Friday’s print, markets had now priced in a roughly 50-50 chance of a rate cut in March, per the CME FedWatch Tool. The Federal Reserve’s next decision on interest rates is slated for Wednesday, Jan. 31.

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December’s PCE reading falls in line…