December PCE Report: In Line with Expectations, Keeping the Fed on Hold

The December Personal Consumption Expenditures (PCE) report, the Federal Reserve’s preferred inflation gauge, came in exactly as expected, reinforcing the Fed’s current stance of holding interest rates steady. The numbers showed modest price growth but remained above the Fed’s 2% target, suggesting that inflation is still elevated enough to keep policymakers cautious. Importantly, the 6-month gauge dipped to 2.3% in December, the lowest reading in 2024.

Markets reacted with little volatility, as the data aligned with Fed Chair Jerome Powell’s outlook from the Wednesday FOMC meeting. The report does not change the current monetary policy narrative—the Fed remains on hold until there is clearer progress on inflation.

Key Inflation Metrics: Sticky but Expected

The headline PCE price index rose 0.3% month-over-month, matching expectations and accelerating from 0.1% in November. On a year-over-year basis, inflation ticked up to 2.6% from 2.4% in November, again meeting forecasts.

The core PCE price index, which excludes food and energy, increased 0.2% month-over-month, in line with estimates and slightly higher than November’s 0.1% gain. On a year-over-year basis, core PCE remained at 2.8%, unchanged from November and right at consensus expectations.

Other inflation-related data points included:

PCE price index excluding food, energy, and housing: +0.1% (unchanged from November).

PCE services price index excluding energy and housing: +0.3%, rising from +0.1% in November, showing some persistence in service-sector inflation.

Consumer and Income Data: Solid Spending, Declining Savings

The report also showed that consumers remained active in December, with personal spending rising 0.7% month-over-month, exceeding estimates of 0.5% and accelerating from 0.6% in November. This suggests strong consumer demand, which could keep inflation pressures elevated.

Personal income grew 0.4%, matching estimates, following a 0.3% increase in November. However, the personal savings rate declined to 3.8% from 4.1%, indicating that consumers dipped into their savings to sustain spending.

Inflation-adjusted (real) consumer spending grew 0.4% in December, a slight slowdown from 0.5% in November, but still reflecting steady demand heading into 2024.

Employment Cost Data: Wage Growth Holds Steady

The Q4 Employment Cost Index (ECI)—a key measure of labor costs—rose 0.9% quarter-over-quarter, in line with expectations and up from 0.8% in Q3.

Wages and salaries increased 0.9%, up slightly from 0.8% in Q3.

Benefit costs rose 0.8%, holding steady from Q3.

The data suggests that wage pressures remain elevated, reinforcing the Fed’s cautious stance.

Fed Reaction: Staying on Hold for Now

The muted market response to the PCE report reflects that the data did not alter the Fed’s outlook. Fed Governor Michelle Bowman, in comments released alongside the report, reiterated that inflation remains too high and justifies a patient approach to rate cuts.

The Fed has maintained that it needs to see sustained disinflation before easing policy, and the stickiness in core PCE at 2.8% reinforces that argument. While the market is still pricing in rate cuts later in the year, this report suggests that the Fed is unlikely to act until at least mid-2024.

Market Outlook: No Change in the Narrative

For investors, the key takeaway is that inflation remains above target but is not re-accelerating in a way that would force the Fed to turn more hawkish. The data supports the current market view that the Fed is on hold for the next few months, but it does not bring forward expectations of rate cuts.

The bigger question now is whether inflation will continue to decline at a pace that allows the Fed to begin easing in the second half of 2024. Until then, markets will remain sensitive to incoming inflation data and Fed commentary.