Economy, U.S.
Federal Reserve Notes Economic Shift: Prices Decline While Central Bank Maintains Cautious Observation
Dec
Last month, there was an unexpected decline in prices, marking the first drop since 2020. This notable shift is particularly evident in the core Personal Consumption Expenditures (PCE) index. It is the preferred measure of the Federal Reserve, and in November, it experienced a year-on-year growth of 3.2%, falling below economists’ expectations. Overall PCE inflation, including food and energy, increased by 2.6% year-on-year.
Persistent Rise in Services, Decline in Goods
Contrary to expectations of a slowdown, service prices continued their ascent, while goods exhibited a noticeable decline. Service inflation grew by 4.1% year-on-year in November, while goods prices decreased by 0.3% compared to the previous year.
Modest Monthly Inflation and Contradiction of Expectations
On a monthly basis, the core PCE inflation rate grew modestly by 0.1%, defying expectations of stability. Food prices increased by 1.8% year-on-year, offsetting the 6% decline in energy prices.
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Estimate Review and Adaptation to Economic Fluctuations
The revision of estimates for data from July to October, including PCE and current-dollar personal income indices, indicates a continued need to adapt to economic fluctuations.
Reinforced Expectations of Deceleration
Expectations of further deceleration in inflation have strengthened, with forecasts suggesting that the central PCE for November likely reached 2% on a six-month annualized basis. This progress could pave the way for a quicker return to the Fed’s 2% target.
Federal Reserve Caution and Future Projections
Despite these encouraging indicators, the Federal Reserve maintains a cautious stance. According to the summary of economic projections from the recent Federal Open Market Committee meeting, the Fed estimates that core PCE inflation will not sustainably return to 2% until 2026.
Market Reaction and Future Outlook
The market is responding to this landscape with an increase in expectations for interest rate cuts, possibly as early as March. The S&P 500 has reflected this optimism with a notable performance.
Morgan Stanley Warning and Mid-Term Perspectives
However, analysts at Morgan Stanley caution that recent soft inflation readings may be exaggerated, anticipating an increase in central PCE to 2.4% in 2024. They predict that service inflation will be crucial in the coming months, potentially delaying rate cuts until June.
Balance Between Positive Figures and Mixed Consumer Price Index Data
Although core PCE inflation figures offer an encouraging outlook, previously released consumer price index data was mixed. The Fed, while acknowledging faster-than-anticipated disinflation, remains cautious and could adjust rates based on the future evolution of the economy.
