Fed's Preferred Inflation Metric Meets Expectations in December

The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) index, rose by 0.3% in December, marking the largest gain since April 2023. This increase pushed the 12-month inflation rate to 2.6%, which is still below the Fed's 2% target but indicates that inflation is no longer rising rapidly. This aligns with the overall trend of disinflation that has been observed in recent months.



Several factors contributed to this increase, which aligns with the Fed's expectations and projections. Energy prices rose by 2.6% in December, accounting for over 40% of the total monthly CPI increase. This was driven by a sharp 4.4% increase in gasoline prices. The Fed had been expecting energy prices to contribute to inflation, as indicated in their Summary of Economic Projections (SEP) in December 2024, which showed an upward revision in energy prices. Food prices increased by 0.3% in December, with both food at home and food away from home prices rising by 0.3%. The Fed had been projecting food prices to remain elevated, as seen in their SEP, which showed an upward revision in food prices. Shelter prices, which make up about one-third of the CPI weighting, rose by 0.3% in December but were up 4.6% from a year ago, the smallest one-year gain since January 2022. The Fed had been expecting shelter prices to decelerate, as indicated in their SEP, which showed a downward revision in shelter prices. Core inflation, which excludes food and energy, rose by 0.2% in December, a slower pace than the previous four months. The Fed had been expecting core inflation to decelerate, as seen in their SEP, which showed a downward revision in core inflation.

These factors align with the Fed's expectations and projections, as they had been anticipating a slowdown in inflation, with energy and food prices contributing to the increase in the short term, while core inflation decelerated. The Fed's projections for 2025 and beyond reflect this expectation, with core inflation expected to decline further. The median FOMC participant penciled in just two 25 basis points of cuts in 2025, down from the four projected in September, suggesting that the Fed is taking into account the improving inflation outlook.

In conclusion, the Fed's preferred inflation metric, the PCE index, rose by 0.3% in December, meeting expectations and indicating that inflation is no longer rising rapidly. This aligns with the overall trend of disinflation and the Fed's projections for a slowdown in inflation. The factors contributing to this increase, such as energy and food prices, align with the Fed's expectations and projections, and the Fed is taking into account the improving inflation outlook when making decisions about interest rates and monetary policy.