The Federal Reserve's favorite inflation indicator falls short of expectations across the board, with the U.S. November core PCE showing the smallest month-on-month increase since May

The Federal Reserve's favorite inflation indicator—the U.S. PCE price index—saw all November data fall short of expectations, with price growth slowing down across the board. The core PCE price index recorded the smallest month-on-month increase in nearly six months, indicating a reduction in price pressures, although it still exceeds the Federal Reserve's 2% inflation target.

On December 20, Friday, the U.S. Bureau of Economic Analysis released data showing that the U.S. November PCE price index rose 2.4% year-on-year, up from 2.3% the previous month, marking the highest level since July, but below the expected 2.5%; month-on-month growth was 0.1%, below the expected 0.2%.

Excluding the more volatile food and energy prices, the core PCE price index rose 2.8% year-on-year in November, unchanged from the previous value, and also below the expected 2.9%; month-on-month growth was 0.1%, below the expected 0.2%, marking the lowest record since May. Federal Reserve officials generally believe that core PCE data is a better indicator of long-term inflation trends.

By category, the price increase for goods was minimal, while service prices rose by 0.2%. Both food and energy prices increased by 0.2%. Over a 12-month period, goods prices fell by 0.4%, service prices rose by 3.8%, food prices increased by 1.4%, and energy prices fell by 4%. Housing inflation remains one of the more stubborn components of inflation, showing signs of cooling in November with only a 0.2% increase.

The closely watched core service prices, excluding housing and energy, rose 0.2% month-on-month, marking the slowest growth since August. Core goods prices, excluding food and energy, fell for the first time in three months.

The report also indicated healthy growth in income and spending, although some data fell short of expectations:

• U.S. personal consumption expenditures (PCE) rose 0.4% month-on-month in November, below the expected 0.5%, with the previous value at 0.4%. After adjusting for inflation, spending growth in November was 0.3%, indicating that consumers showed resilience during the critical holiday shopping season. This was mainly driven by purchases of goods, which rebounded from the previous month, partly due to automobiles. Meanwhile, actual spending in the service sector was at its lowest level since the beginning of the year.
• Supporting consumption is robust income. Wages and salaries grew by 0.6% in November, the largest increase since March. However, overall disposable income grew only 0.3%, below the expected 0.4%, following a 0.7% increase in October, impacted by declines in dividend income and government benefits.
• The personal savings rate slightly decreased to 4.4%.

Friday's PCE report was released following another important data set from the U.S. Bureau of Economic Analysis on Thursday. The Thursday data indicated that the U.S. economy grew faster than previously expected in the third quarter, partly due to increased consumer spending

Wall Street Commentary

Nick Timiraos, a reporter for The Wall Street Journal known as the "new Fed communicator," stated that the overall PCE and core PCE showed moderate performance in November. The data released on Friday, even if published after the FOMC meeting, would not constitute "news" for the Federal Reserve. If one knows the Producer Price Index (PPI), Consumer Price Index (CPI), and import prices for a certain month, a fairly reliable prediction of Personal Consumption Expenditures (PCE) can be made.

Bloomberg economists share a similar view, pouring cold water on the cooling PCE data, stating that the moderation in core PCE inflation may be temporary, and the Federal Reserve can estimate this data quite accurately before the December meeting. In the coming months, rising prices in financial services may push related inflation data back up.

However, optimists believe that the moderate performance of the core inflation indicator preferred by the Federal Reserve in November is a step in the right direction for policymakers hoping for further rate cuts in 2025. The latest PCE data is the first recent indication that U.S. inflation is cooling again, after months of stagnation in inflation progress.

This stagnation prompted the Federal Reserve to update its forecasts earlier this week, significantly increasing expectations for inflation and interest rates in 2025, which triggered widespread selling in the market. San Francisco Fed President Mary Daly expressed her "great satisfaction" with the median forecast of two rate cuts next year before the release of the PCE data on Friday, emphasizing that the Federal Reserve can take a slower approach to rate cuts.

Paul Ashworth, Chief North America Economist at Capital Economics, stated in a report that overall, this is exactly what the Federal Reserve wants— the U.S. economy remains strong, but price pressures are lower.

Chris Larkin, Managing Director of Trading and Investment at E-Trade Morgan Stanley, said, "Stubborn inflation seems to have eased this morning. The preferred inflation indicator of the Federal Reserve came in below expectations, which may alleviate some of the market's disappointment over the Fed's rate announcement on Wednesday."

Market Reaction

After the data was released, U.S. stocks and bonds rebounded, and the dollar weakened, with traders still expecting that the rate cuts by the end of next year would not exceed two 25 basis point cuts.

• U.S. stock futures surged briefly, with the Nasdaq 100 futures narrowing their decline to 0.9%.
• The yield on the U.S. 10-year Treasury bond fell 2 basis points to 4.512%.
• The yield on the U.S. 30-year Treasury bond fluctuated little, reported at 4.740%.
• The US Dollar Index has dipped in the short term, reporting 107.97, with an intraday decline of 0.4%.