Federal Reserve’s preferred inflation gauge rises less than expected

The Federal Reserve’s preferred measure of inflation rose less than expected in November, bolstering bets that the central bank will begin cutting interest rates next year.

The Personal Consumption Expenditures price index (PCE), a gauge of core inflation that excludes food and energy costs, rose 0.1% from a month earlier, according to a report the Bureau of Economic Analysis released Friday.

That was lower than the 0.2% rise forecast by economists polled by Reuters. The year-over-year increase was 3.2%, lower than October’s 3.4% gain.

The figures signal that the Fed is winning a nearly two-year battle agaginst inflation — and further increase the odds for lower interest rates in the new year.

The Federal Reserve has already signaled that it intends to slash interest rates — which are currently between 5.25% and 5.5% — by as much as 75 basis points in 2024.

Projections from all 19 policymakers that showed near unanimity that borrowing costs would fall next year, many of them by a substantial margin following their latest policy meeting earlier this month, when borrowing costs held steady at their 22-year high.

Since last year, the Fed has hiked interest rates 11 times — the fastest pace of tightening since the early 1980s.

And although the aggressive tightening regime has brought inflation down from its 9.1% peak in June 2022 to 3.1% in November, per the latest Consumer Price Index reading, it’s not enough for Fed Chair Jerome Powell, who has his sights set on a 2% inflation target — a figure the US economy hasn’t seen since 2012.

Powell hedged earlier this month in closely-watched remarks following central bankers’ latest policy meeting that he couldn’t definitively rule out higher rates at this point, even as officials looked toward a lower policy rate.

“While we believe our policy rate is at or near its peak for the tightening cycle, the economy has surprised forecasters,” Powell said.

Because of the unpredictable nature of the economy, he said that while Fed officials “do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table” if it’s needed.

The newest projections showed policymakers see the risks to inflation and employment — the two planks of the Fed’s dual mandate — were coming into better balance.

Aside from the latest CPI report’s stubbornly-high reading, US payroll gains have also surprised economists, adding a strong 199,000 jobs last month.

The unemployment rate also edged down to 3.7% — a positive sign considering lower hiring stints combined with higher-than-expected unemployment have historically signaled a recession.