Prime Highlights: 

In December, the PCE index increased by 0.3%, while core PCE rose by 0.2%, both meeting forecasts. 

Food prices rose by 0.2%, while energy costs jumped 2.7%, contributing to the overall inflation figures. 

Key Background: 

The U.S. economy closed 2024 with inflation remaining above the Federal Reserve’s target, according to the latest data from the Commerce Department. The Personal Consumption Expenditures (PCE) price index showed a 2.6% year-over-year increase in December, slightly higher than the previous month’s 2.4% rise. Excluding volatile food and energy prices, core PCE inflation came in at 2.8%, matching expectations and holding steady from November. 

While the PCE data is closely watched by the Federal Reserve, the central bank’s preferred measure of inflation is the core PCE, which excludes food and energy due to their price volatility. Although the December readings met forecasts, they remain well above the Fed’s 2% inflation target, a level not seen since February 2021. 

On a monthly basis, the PCE index rose by 0.3% overall, while the core index increased by 0.2%. The data indicates continued price pressures, although the rate of increase has slowed. Food prices rose by just 0.2%, while energy costs surged by 2.7%. Durable goods prices, including items like appliances and electronics, saw a decrease of 0.4%, while nondurables increased by 0.5%. 

The report comes two days after the Federal Reserve held interest rates steady at a range between 4.25% and 4.5%, pausing after three consecutive rate cuts in 2024. Fed officials, including Chicago Fed President Austan Goolsbee, expressed cautious optimism that inflation is moving toward the 2% target. However, some uncertainty remains, particularly regarding fiscal policy, as noted by Fed Governor Michelle Bowman, who emphasized the need for clear evidence of inflation deceleration before further rate cuts. 

In other economic news, personal income increased by 0.4% in December, while consumer spending rose by 0.7%, slightly outpacing expectations. Additionally, the Bureau of Labor Statistics reported that the Employment Cost Index (ECI) rose by 0.9% in Q4 2024, in line with expectations, signaling moderate wage growth. 

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