US prices rise moderately in December; inflation trending lower

WASHINGTON — US prices rose marginally in December, keeping the annual increase in inflation below 3% for a third straight month, bolstering expectations that the Federal Reserve will start cutting interest rates this year.

But the timing of the anticipated rate cut is uncertain, with the report from the Commerce Department on Friday also showing consumer spending surging at the end of 2023 as Americans splurged on goods and services over the holidays.

Financial markets have pushed the odds of a March rate cut to below 50% in a nod to the economy’s continued resilience. The US central bank is expected to keep its policy rate unchanged at the current 5.25%-5.50% range at its meeting next week.

The personal consumption expenditures (PCE) price index increased 0.2% last month after dropping 0.1% in November, the Commerce Department’s Bureau of Economic Analysis said. Food prices rose 0.1% and the cost of energy products increased 0.3%.

In the 12 months through December, the PCE price index advanced 2.6%, matching November’s gain. The inflation readings were in line with economists’ expectations.

Excluding the volatile food and energy components, the PCE price index climbed 0.2% after rising 0.1% in November. The so-called core PCE price index increased 2.9% year-on-year, the smallest gain since March 2021, after rising 3.2% in November.

The Fed tracks the PCE price measures for its 2% inflation target. Monthly inflation readings of 0.2% over time are necessary to bring inflation back to target.

Core services prices excluding housing, the primary concern for policymakers, rose 0.3%. They increased 3.3% year-on-year after advancing 3.5% in November.

Some economists argue that core inflation is already on target. Measured on an annualized basis, core inflation rose at a 1.5% rate over the past three months and increased at a 1.9% pace in the last six months. The government reported on Thursday that core PCE inflation advanced at a 2.0% rate in the fourth quarter after a similar rise in the July-September period.

Economists said Fed officials were likely to place more weight on the fourth-quarter inflation reading as the quarterly data ironed out month-to-month volatility.

Though prospects of a March rate cut have diminished, a reduction in borrowing costs is still expected by June. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.

Easing inflation along with rising wages from a tight labor market and households tapping their savings combined to boost consumer spending and support the overall economy.

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 0.7% after rising 0.4% in November amid gains in both goods and services.

Spending on goods surged 0.9% as Americans stepped up purchases of new light trucks, clothing and footwear as well as recreational goods and vehicles. They also spent more on gasoline, furniture and household equipment.

Services outlays rose 0.6%, lifted by financial service charges, fees and commissions, housing and utilities, recreation, hospital and outpatient care, and gambling.

When adjusted for inflation, overall consumer spending increased 0.5% in December after a similar rise in the prior month. The solid increase in the so-called real consumer spending puts consumption on a higher growth path heading into the first quarter.