The Fed’s go-to inflation gauge heated up again

By Alicia Wallace, CNN

(CNN) — The Federal Reserve’s preferred inflation gauge moved even higher in December, driven largely by rising energy prices as well as food. However, a closely watched measurement of underlying inflation trends indicated some progress in the fight to rein in price hikes.

The Personal Consumption Expenditures price index rose 2.6% in December from the year before, heating up from November’s 2.4% increase, according to new Commerce Department data released Friday.

On a monthly basis, prices rose 0.3% as compared to 0.1% in November.

That acceleration was in line with economists’ expectations, which called for a 0.3% increase from November and a 2.6% annual gain, according to FactSet consensus estimates.

The core PCE price index, which excludes the more volatile components of gas and food, hit expectations on the nose: It rose 0.2% from November and the annual rate of underlying inflation held pat at 2.8% for the third month in a row, according to the report.

Inflation has cooled substantially since peaking in the summer of 2022, and that progress continued through 2024 to the point where an elusive “soft landing”— price stability without having the economy tank into a recession — remained achievable as Joe Biden wrapped up his presidency.

Consumers are spending more…

The PCE price index is part of the Commerce Department’s monthly Personal Income and Outlays report, which includes comprehensive data on how Americans earn, spend and save.

And in December, they ramped up their spending significantly.

Consumer spending shot up 0.7% from November, exceeding economists’ expectations for a 0.5% gain.

With Thanksgiving landing late in November, the holiday shopping season was largely concentrated in December; also, the increase likely reflected some replacement purchases of cars, furniture and other goods damaged by the two major hurricanes that hit in October 2024, Gregory Daco, chief economist at EY-Parthenon, told CNN Friday.

Another likely factor is that consumers also were buying more durable goods in anticipation of tariffs that have been threatened by President Donald Trump, Samuel Tombs, Pantheon Macroeconomics’ chief US economist, wrote in a note to clients on Friday.

Purchases of TVs, technology products and autos have notably surged, he noted.

Trump on Thursday reiterated plans to slap a 25% tariff on imports from both Canada and Mexico.

“Consumers shop with an eye on bargains, and 25% tariffs of the imports of America’s two largest trading partners could force prices of store-bought goods well beyond the reach of many if not all consumers,” economist Chris Rupkey of FwdBonds wrote in commentary on Friday. “There may not be another full-blown cost of living crisis, but the future with tariffs certainly looks less affordable for all Americans.”

“We are not sure the country is willing to pay the price for the new administration’s social goals of stopping migrants and illicit drugs at the border,” he added.

…But they’re saving less

The sheer rate of spending does not appear to be sustainable, Pantheon’s Tombs noted.

Households’ personal saving rate — savings as a percentage after tax — was the lowest in two years, Commerce Department data shows. The saving rate dropped to 3.8% from 4.1% in November, according to Friday’s report.

“It now is 2 percentage points below its 2015-to-19 average,” Tombs said.

Consumers also are leaning more on their credit cards. The share of people making just the minimum payment on their credit cards hit a 12-year high, according to third-quarter 2024 data released last week by the Federal Reserve Bank of Philadelphia.

“It’s an orange flag,” EY-Parthenon’s Daco told CNN. “We’re noticing that there is a bifurcation in the consumer outlook in that the consumers at the lower-to-medium end of the income spectrum are spending more judiciously in a high-price, high-interest-rate environment.”

The strong momentum seen in the consumer spending data has largely been driven by higher income individuals, he said.

Overall, personal income grew 0.4% in December, marking a slight acceleration from the 0.3% gain seen the month before, according to Friday’s report.

“The monthly numbers add some more light on the income side of the economy,” Eugenio Alemán, chief economist at Raymond James, wrote Friday. “This showed that consumers are deploying their savings to ‘keep up with the Joneses,’ which could become a problem down the line.”

Slowing inflation in the cards — for now

Friday’s release marked the final inflation report for 2024, and while the last chapter showed a “bump in the road” during the fourth quarter, the underlying fundamentals remain disinflationary, Daco said.

That story should continue through the first couple of months of this year, he said, noting disinflationary dynamics like cautious consumer spending, constrained pricing power, strong productivity growth, easing shelter cost inflation, slowing insurance-related inflation and cooling wage growth. (Separately, on Friday, the Bureau of Labor Statistics reported that workers’ compensation grew 3.8% for the year ended in December, slowing from a 3.9% rate notched in September.)

However, he added, the inflationary risks are much higher than they were before the election, he added.

“As we look further out, then you might start to see the pressures from some of the policies that are put in place — immigration restrictions; perhaps even some deregulation; and tariffs, of course, are big, big unknowns,” he said. “But their effect on the economy is likely to take a bit more time.”

The path to the Fed’s 2% inflation target was expected to be long and bumpy, and it has been a little choppy the past couple of months, prompting the central bank to take a more cautious approach to rate cuts in 2025.

Fed Chair Jerome Powell said Wednesday that inflation remains elevated; but the labor market is solid, and the economy is strong, so the central bank doesn’t have to hurry more rate cuts. He also indicated policymakers are taking a wait-and-see approach as some of Trump’s sweeping policy moves come to fruition.

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