US inflation slows further, raising prospects of soft landing for world’s largest economy

Inflation in the US continued its gradual descent in December, adding to hopes that a soft landing is within reach.

The Commerce Department’s personal consumption expenditures (PCE) price index increased 0.2 per cent last month, up from a 0.1 per cent drop in November. On an annual basis, PCE inflation remained unchanged at 2.6 per cent.

Core PCE inflation – which excludes food and energy – rose 0.2 per cent last month, up from a 0.1 per cent rise in November. It eased to 2.9 per cent per cent annually after a 3.2 per cent increase in November.

Economists surveyed by The Wall Street Journal expected core PCE inflation would rise 0.2 per cent in December and 3 per cent on an annual basis.

Consumer spending – which accounts for about 70 per cent of economic activity – increased 0.7 per cent in December.

Separate federal data released showed PCE inflation for the last three months of the year eased to 1.7 per cent, while core PCE rose 2.0 per cent – both within the Fed’s 2 per cent goal.

The latest batch of economic data indicated continued momentum towards a soft landing as inflation shows signs of moderation, consumer spending remains strong and layoffs remain low. The report is the final piece of inflationary data before the January 30-31 Federal Reserve’s monetary policy meeting. The central bank is expected to hold interest rates steady at 5.4 per cent.

The Fed closely monitors core PCE data when making its monetary policy decisions.

While keeping rates steady at the conclusion of their January meeting is a near certainty, traders will be looking for clues for when the Fed may begin cutting rates. Projections released by the Fed showed it expects three quarter-rate cuts this year, although it has not suggested when that might begin.

Markets are split over when the Fed may cut rates after January. According to the CME Group, 48 per cent believe the first rate cut will happen in March, while 50 per cent think it will be in May.