The trend is clear: inflation is cooling in America.
The Federal Reserve’s preferred measure of inflation showed that price increases continued to moderate in November, providing another welcome indication that the period of painfully high prices has peaked.
The Personal Consumer Expenditures, or PCE, price index rose 5.5% in November from a year earlier, the Commerce Department reported Friday. This is less than in October, when prices increased by 6.1% per year.
In November alone, prices rose only 0.1% compared to October.
Core PCE, which excludes the volatile food and energy categories, rose 4.7% year-on-year and 0.2% on a monthly basis, in line with expectations of economists polled by Refinitiv. .
The annual increases in both PCE inflation indices hit their lowest levels since October 2021 and follow continued declines in other inflation indicators, such as the consumer price index and the index of producer price.
The PCE, especially the core measure, is the Fed’s preferred inflation gauge because it provides a more complete picture of costs to consumers.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending rose 0.1% in November from 0.8% the previous month. Personal income rose 0.4% in November, compared to 0.7% in October.
November’s PCE report, the last major inflation gauge released in 2022, provided a snapshot of an economy in transition. Tasked with reining in the highest inflation since the early 1980s, the Fed undertook a series of dramatic interest rate hikes to stifle demand.
In its seven meetings starting in March, the central bank’s policy arm raised its benchmark interest rate by a cumulative 4.25 percentage points. The sharp rise in rates has begun to ripple through the economy, with its effects first showing in areas such as real estate, where mortgage rates were at 6.27% this week, more than double the rate observed last year around this time, according to Freddie Mac Data.
“The economy is moving in the right direction from the Federal Reserve’s perspective at the end of 2022, but not fast enough,” Gus Faucher, chief economist at PNC Financial Services, said in a statement. “Rising interest rates are weighing on consumer spending, especially for durable goods, and inflation is slowing.”
Inflation has moderated in recent months, particularly on items such as goods, as supply chain bottlenecks have eased and consumers have concentrated their spending more on areas such as leisure and hospitality.
However, inflation in the services sector has been a little “sticky” and has not calmed down as quickly. Friday’s PCE report showed the services index posted a monthly increase of 0.4% – unchanged from October’s rate – and a year-on-year increase of more than 11%, noted Faucher.
While much of the inflation in services is driven by housing costs, which are rapidly reversing, the Fed worries that strong wage growth will fuel persistent increases in services prices and inflation. overall, he added.
“The Federal Open Market Committee will continue to raise the federal funds rate in early 2023 until it becomes more evident that the labor market is cooling and wage growth and services inflation slow to longer lasting beats,” he added.
The Fed’s latest economic projections released last week showed board members expecting inflation to stay slightly higher for longer than expected. Fed board members now expect PCE inflation to end 2023 at 3.1% and core PCE to end next year at 3.5%, above the central bank target rate of 2%.
A separate Commerce Department report released on Friday showed new orders for manufactured goods fell 2.1% in November, the biggest monthly drop since the start of the pandemic.
Transportation equipment, particularly new orders for aircraft and non-military parts, led the decline, according to the report. Excluding transport, new orders increased by 0.2%.
Shipments rose 0.2% in November, after rising 0.4% in October.
“Orders for core durable goods slowed but did not contract, reflecting growing unease about the economy,” said Diane Swonk, chief economist at KPMG, tweeted Friday after the report was released. “Manufacturing activity has started to contract and the preliminary reading for December suggests that it will contract further at the end of the year. A cold winter expected for the manufacturing sector.
The slow decline in inflation was also good news for consumers, helping to revive their economic sentiments in December, according to new data released Friday by the University of Michigan.
December’s final reading of the Consumer Sentiment Index came in at 59.7 in December, up slightly from a preliminary reading of 59.1 and November’s final reading of 56.8, according to university consumer survey data.
“Consumers have clearly welcomed the recent decline in inflation,” Joanne Hsu, director of consumer surveys, said in a statement. “While sentiment appears to have turned a corner from its all-time low in June, consumers have reserved judgment on whether trends continue.”
She added: “Their economic prospects may have improved, but they remain relatively weak. The sustainability of robust consumer spending depends on continued strength in incomes and labor markets over the coming quarters.
The report showed the biggest improvement in sentiment on business conditions, while inflation expectations also improved, falling to 4.4% in December, the lowest reading in 18 months, according to the university. . This is a key data point for the Federal Reserve. If consumers believe that prices will remain high, this could lead to higher wage demands, which could induce companies to raise prices.
Earlier this week, the Conference Board’s Consumer Confidence Index – another measure of how consumers feel about the economy – hit its highest reading since April 2022.
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