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US Core Inflation Continues its Descent, While Consumer Spending Remains Brisk

US core PCE inflation eased to its lowest point in nearly three years, despite robust consumer demand during holiday shopping. The core personal consumption expenditures (PCE) price index, which excludes the fluctuating prices of food and energy, rose 2.9% in December compared to the same month the previous year. The index saw a 0.2% increase from the previous month. Headline increased at 2.6% yoy and 0.2% mom.

Consumer spending rose by 0.7% in nominal and 0.5% in real terms in December, marking the highest nominal increase in 3 months. Disposable income, a key driver of consumer spending, saw an increase of 0.3% in nominal and 0.1% in real terms.

The six-month annualized core PCE inflation rate, which Fed chair Powell explicitly mentioned, stood at 1.9% in December, remaining below the Fed's 2% target for the second consecutive month.

Our Take: This data provides further evidence that inflation is gradually returning to the target level, potentially paving the way for rate reductions once there are clear signs of economic deceleration. However, considering the latest robust economic activity figures, we believe that anticipations of rate cuts in March and April might be premature and seem rather unlikely at the current juncture.

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