PCE Deflator

The Personal Consumption Expenditures (PCE) deflator, the Federal Reserve’s preferred inflation gauge, rose 0.3% in December, up from 0.1% in November—its fastest monthly pace since April. Energy prices surged 2.7%, contributing to the stronger headline inflation reading, while food costs increased 0.2% for the second consecutive month. Stripping out the more volatile food and energy categories, core PCE climbed 0.2% in December, up slightly from 0.1% in November.

On a year-over-year basis, the PCE deflator increased 2.6%, rising from 2.4% in November and marking its highest level since May. Meanwhile, core inflation held steady at 2.8% for the third straight month. While inflation pressures have significantly eased from their recent peaks—7.1% in June 2022 for the PCE deflator and 5.5% in September 2022 for core PCE—core inflation remains above the Federal Reserve’s 2% target, with price pressures persisting in key areas.

The Federal Reserve is expected to maintain a cautious stance, closely monitoring inflation trends before making further policy adjustments. The Federal Open Market Committee (FOMC) left short-term interest rates unchanged at its latest meeting, signaling a wait-and-see approach as it assesses upcoming data. With inflation proving stickier than policymakers would like, interest rates are expected to remain elevated, even as the potential for cuts later this year remains on the table.

Personal consumption expenditures climbed 0.7% in December, building on 0.6% growth in November and reinforcing the resilience of consumer spending. However, spending on food services and accommodations declined 0.2%, marking the first pullback in 11 months. Over the past year, personal spending has risen 5.7%, while food services and accommodations saw a more modest 3.3% year-over-year increase. These figures highlight consumer spending’s critical role in propping up the U.S. economy, helping offset broader economic headwinds.

Yet, a portion of this growth reflects higher prices rather than increased consumption. Real personal consumption expenditures, adjusted for inflation, rose 0.4% in December, with 3.1% year-over-year growth in chained 2017 dollars. In contrast, inflation-adjusted spending on food services and accommodations declined 0.2% for the month and remained essentially flat over the past year, emphasizing the ongoing strain of rising costs on consumers in the sector.