A key U.S. inflation measure showed prices rose again in December, suggesting that the respite in price increases seen the previous month was short-lived.
The personal consumption expenditure price index rose 0.2% month-on-month, in line with expectations and up from -0.1% in November. This is the largest month-on-month increase in the PCE price index since September.
The core rate of PCE inflation, which excludes food and energy costs, rose 0.2%. This was in line with consensus expectations and slightly above November's 0.1% rise. This was also the largest increase since September.
Compared to a year ago, overall prices are up 2.6%, exactly in line with November, according to the PCE Gauge. Core price metrics have increased him 2.9% over the past 12 months, marking the first time in almost three years that he has risen less than 3% on an annual basis.
The Fed uses the PCE price index for its 2% inflation target. Inflation has been above the Fed's target since March 2021, indicating that prices are rising faster than the Fed considers appropriate for a healthy economy.
Fed officials at their December meeting expected year-over-year inflation to fall to 2.4% by the end of the year, with core inflation also expected to fall to 2.4%. Fed officials predict that prices will not return to target until 2026.
A decline in inflation does not mean a reversal of past price increases, but rather a slowing of price increases. Fed officials refer to the decline in inflation as “disinflation.” Prices rarely reverse completely and usually do not hold up except in severe economic downturns.
Inflation has fallen significantly since the PCE price index peaked at 7.1% in June 2022, and progress in curbing inflation has been much slower than Fed officials initially expected. Inflation fell in every month from January to June except April. But progress stalled between June and September. Year-on-year inflation has been declining every month since falling in October.
On a month-to-month basis, progress over the past year has been uneven. Inflation rose as much from the previous month as it fell. Still, the overall trajectory brought inflation down from a 0.6% monthly increase in January 2023 to 0.2% in December.
If the economy experienced the inflation rate seen in December in each month of the next year, inflation would be about 2.1%, slightly above the Fed's target. Some economists like to annualize the past three months of inflation, which was 1.5% in December. The annualized inflation rate after six months will be 1.9%.
