US inflation gauge cools on lower energy prices

A measure of inflation favored by the US Federal Reserve weakened last month on lower energy prices, US government data showed on Friday, providing further reassurance to policymakers keen to rein in price increases.

The personal consumption expenditures (PCE) price index rose 2.6 percent from a year ago, markedly below October’s 2.9 percent increase, the US Department of Commerce said.

Compared with a month prior, the index decreased 0.1 percent — the first drop since early 2020 — on the back of a slump in energy prices and lower food costs.

With the volatile food and energy segments removed, “core” PCE inflation cooled to an annual rate of 3.2 percent, down slightly from October as well.

This adds to data indicating that inflation is coming down as the US central bank holds interest rates at a 22-year high to firmly lower inflation back to its long-term 2 percent target.

With consumption and the jobs market remaining relatively resilient, hopes of a so-called “soft landing” where inflation comes down without triggering a damaging recession have risen.

Calling the data “encouraging reading,” Oxford Economics Ltd economist Michael Pearce said they signaled that consumption growth is slowing to a more sustainable pace while pressures from inflation melt away.

Friday’s numbers also showed that US consumption last month ticked up 0.2 percent from a month prior, while personal incomes increased too.

A bounce in payroll growth and robust wage increases helped push personal incomes up, with spending rising as well.

“That allowed the personal saving rate to rise a bit,” Pearce added. “We think households will continue to rebuild saving into next year.”

From October to last month, the core PCE price index inched up 0.1 percent, the department said.

“Barring some unforeseen shock to prices, the Fed is done raising rates this cycle and the expansion should continue well into the new year,” Navy Federal Credit Union economist Robert Frick said.

With price pressures “weakening fastest in the services sector and with inflation set to fall further over the coming months, rate cuts are coming into view,” Pearce added.

However, even as the data fuel optimism, Pantheon Macroeconomics Ltd chief economist Ian Shepherdson said there is a risk that inflation falls below officials’ target more quickly than expected.

“Against that backdrop, markets will push even harder for the Fed to ease by more than their current 75 basis points forecast next year, and policymakers will have little choice but to follow their lead,” he said.