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The Fed closely monitors tightness in the labor market as a barometer for the US economy. Above, a Chick-fil-A worker in Texas.
Brandon Bell/Getty Images
The Federal Reserve’s benchmark inflation rate rose to 4.4% in December, down from 4.7% in November, signaling that the era of red-hot rates is over and that the Fed may soon turn to tighter monetary policy. Position
The core personal consumption expenditures (PCE) price index, also known as the core PCE deflator, rose 4.4 percent in November from 4.7 percent in December.
The headline PCE deflator, which includes food and energy prices, fell to 5% in November from 5.5% in December, further evidence that inflation is cooling.
Investors who accepted the decline in inflation as a sign that fewer interest rate hikes may be coming—they seemed unfazed by the news, which did little to advance the narrative around inflation. Tracking futures contracts
Dow Jones Industrial Average
And
S&P 500
They were marked slightly higher after release but still ready to open in the red.
But the news was not all positive. The report showed that private consumption spending fell by 0.2% in December from November, which investors see as a worrying sign for the economy.
Wall Street remains at risk of recession. The first reading for the fourth quarter of 2022, released Thursday, showed that U.S. economic growth has passed the peak of the recent expansion and the core components of growth are weakening.
(This is a developing story. Please check back soon for more details and analysis. See what economists were expecting before the data was released.)
The Federal Reserve’s preferred measure of inflation showed a downward trend in inflation, supporting the narrative that the central bank may soon taper in its battle against high rates.
According to a consensus estimate of economists polled by FactSet, the core personal consumption expenditures price index in December is expected to have slowed slightly from November’s 4.7 percent increase. On a month-to-month basis, the index is expected to rise by 0.3%. This index, also known as the core PCE deflator, measures the prices US consumers pay for goods and services, excluding food and energy.
Meanwhile, the headline PCE deflator, which includes food and energy, is expected to be flat on the month. Both acts will air Friday at 8:30 p.m. Eastern.
Indicators should confirm the latest data at the consumer level, which suggests that inflation has passed its peak. That should ease some pressure on the Fed, which last year launched a determined campaign to tighten financial conditions to combat high consumer prices. It should also ease pressure on investors: The Fed’s seven rate hikes in 2022—including the biggest in decades—were a headwind for the stock market.
S&P 500
In the year A decline of nearly 20% by 2022.
However, Fed officials have telegraphed that fighting inflation is a priority and that the central bank will continue to raise interest rates in 2023. January 31 and February 1. This marks the central bank’s smallest rate hike since it began tightening financial conditions last March. PCE publications will be the last pieces of the overall inflation rate that federal officials evaluate before monetary policy decisions.
Investors are entering Friday with at least a modicum of clarity, as PCE data is included in the fourth-quarter US gross domestic product report.
Core PCE increased 3.9% in the fourth quarter of 2022, according to the GDP report. While there may be revisions to November’s data that will affect this figure, analysts can still crunch the numbers to come up with December’s estimate. Communication seems to be about location.
“The main PCE data showed a 0.28% increase in December, according to consensus for tomorrow’s report, but this would not be an improvement on the previous data,” Pantheon Macroeconomics Chief Economist Ian Shepherdson said in a note. “We expect a 0.2% increase in December and a slight upward revision through November. Either way, the trend is slowing.”
While PCE is the Fed’s preferred measure of inflation, it doesn’t tell the story as the central bank moves monetary policy forward. Fed Chairman Jerome Powell and other officials said they were closely watching the tightening of the labor market as a barometer for the US economy. Weekly labor data released Thursday showed jobless claims were down, and federal officials can review Employment Cost Index (ECI) data on Jan. 31, a day before they announce their next rate decision.
“It’s hard to see moderate wage inflation at these growth rates when the unemployment rate rises to the desired level,” said Alexandra Wilson-Elizondo, head of multi-asset retail investment at Goldman Sachs Asset Management, after Thursday’s gross domestic product release. “We need activity weakness to translate into job losses to offset Powell’s preferred services former measure of accommodation inflation, with wages being the main driver.”
Write to Jack Denton at jack.denton@barrons.com
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