Fed's Favorite Inflation Gauge Rises As Predicted, Consumer Spending Jumps At Fastest Pace In 9 Months

The Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose as expected in December, with core PCE, which excludes volatile food and energy prices, also increasing. This aligns with the central bank's 2% target for inflation, but it remains above the target level. Meanwhile, consumer spending in the U.S. jumped at the fastest pace in nine months, driven by strong consumer confidence and job market, pent-up demand, government stimulus, and low interest rates. However, the sustainability of this pace is uncertain, given potential headwinds such as inflation, supply chain disruptions, economic uncertainty, and fiscal policy.

The PCE index rose 0.3% from the prior month and increased 2.6% from a year ago, in line with estimates. Core PCE, which excludes volatile food and energy prices, rose 0.2% for the month and increased 2.8% from a year ago, also in line with estimates. This aligns with the central bank's 2% target for inflation, but it remains above the target level. The ongoing efforts to wrestle down inflation suggest that the Fed may continue to monitor inflation closely and consider further monetary policy actions to bring it back in line with the target.

Consumer spending in the U.S. jumped at the fastest pace in nine months, driven by several factors. The job market has been robust, with employers continuing to hire, which has boosted consumer confidence and income. This, in turn, has led to increased spending. After the COVID-19 pandemic, there has been a surge in pent-up demand as people have been eager to spend on goods and services they had delayed purchasing during lockdowns. The U.S. government has provided significant stimulus packages, which have put more money in consumers' pockets, contributing to increased spending. Additionally, the Federal Reserve has maintained low interest rates, making borrowing cheaper and encouraging consumers to spend more.

However, the sustainability of this pace in the long term is uncertain, given the current economic climate and potential headwinds. The recent Consumer Price Index (CPI) report showed prices up 5.4% last month over June 2020, the highest increase since the Great Recession in 2008. This rise in inflation could erode consumers' purchasing power and discourage spending. The ongoing supply chain issues and bottlenecks could lead to further price increases and shortages, which may dampen consumer spending. The Delta variant and other potential future shocks could lead to renewed uncertainty, affecting consumer confidence and spending. The expiration or reduction of government stimulus programs could also lead to a decrease in consumer spending.

In conclusion, while the recent increase in the Fed's preferred inflation gauge, the PCE index, aligns with the central bank's 2% target, it remains above the target level. The jump in consumer spending is driven by several factors, but its sustainability in the long term is uncertain, given potential headwinds and challenges that the economy may face. The Federal Reserve will continue to monitor inflation trends and consumer psychology to ensure that the economic recovery remains on track.