Fed's preferred inflation gauge cooled in November, but prices remained stubbornly high
Economists expected core inflation to increase again in November
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An inflation gauge closely watched by the Federal Reserve showed welcome signs of slowing in November, but it still remained abnormally high, according to new data released Friday.
The Personal Consumption Expenditures (PCE) index showed that consumer prices climbed 0.1% from the previous month and rose 5.5% on an annual basis, according to the Bureau of Labor Statistics.
Core prices, which strip out the more volatile measurements of food and energy, climbed 0.2% from the previous month and rose 4.7% on an annual basis. Those figures are both in line with forecasts by Refinitiv economists.
While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation.
INFLATION EASES MORE THAN EXPECTED IN NOVEMBER TO 7.1%, BUT CONSUMER PRICES REMAIN ELEVATED
A person shops at a supermarket in New York City on Dec. 14, 2022. (UKI IWAMURA/AFP / Getty Images)
"Core inflation is a better predictor of inflation going forward," Powell said. "Headline inflation tends to be volatile."
NOVEMBER INFLATION BREAKDOWN: WHERE ARE PRICES RISING THE FASTEST?
Both the core and headline numbers point to inflation that is running well above the Fed's preferred 2% target, a troubling sign as the central bank is already hiking interest rates at the fastest pace in decades.
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Policymakers have already approved seven straight rate hikes, pushing the federal funds rate well into restrictive territory. The central bank has signaled that it will raise rates higher than previously anticipated, though it plans to pause the increases at some point in 2023.
"We've continually expected to make faster progress on inflation than we have," Powell told reporters earlier this month. "That's why the peak rate for this year goes up between this meeting and the September meeting. You see the fact that we've made less progress than expected on inflation."
Federal Reserve Chair Jerome Powell speaks during a press conference in Washington, D.C. (Liu Jie/Xinhua / Getty Images)
In a potentially worrisome sign, the report suggested that uncomfortably high inflation combined with steeper interest rates are finally beginning to weigh on consumer spending. Spending climbed just 0.1% in November from the previous month, compared to an increase of 0.9% in October.
"The Federal Reserve’s preferred measure of inflation continues to go down, which is good news for their most important objective, but unfortunately for the market, it is happening at the same time as consumers continue to reduce their spending," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
Inflation-adjusted spending rose was flat in November.