Inflation cools further ahead of key Federal Reserve meeting

Inflation showed more signs of cooling Friday, according to data released by the Commerce Department, keeping the Federal Reserve on track to slow down its interest rate hikes next week.

The personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation, was up 5 percent annually in December, down from a 5.5-percent annual inflation rate in November and a nearly 7-percent rate in June of last year.

Taking out the volatile categories of food and energy, core PCE fell to a 4.4-percent annual increase off a recent high of 5.2 percent in September.

The new inflation data comes less than a week before the Fed is expected to issue its smallest interest rate hike since March 2022. The Fed’s monetary policy committee is set to meet from Jan. 31 to Feb. 1 in Washington, D.C., and is all but certain to issue its eighth straight rate hike in consecutive meetings.

Friday’s data from the Commerce Department shows that consumers are spending more on the same goods and services than they were a year ago, but that that annual increase is shrinking back toward healthier levels.

It also shows that personal incomes are falling off, up only 0.2 percent in December compared to 0.3 percent in November and 0.8 percent in October. Disposable incomes stayed flat across November and December at 0.3 percent monthly increases.

“Slowing inflation should minimize the drop in real spending, and income growth seems likely to be consistent with the Fed’s inflation target looking at the monthly change,” UBS economist Paul Donovan wrote in a note to investors on Friday.

The drop in the PCE has been mirrored in other measures of inflation, with the Labor Department’s consumer price index falling to 6.5 percent annually off a high last year of 9.1 percent. The producer price index (PPI), a measure of wholesale inflation, also sank to a recent low of 6.2 percent in December, with core PPI hitting 4.6 percent.

The Fed is expected to raise interest rates at its meeting next week by 0.25 percent, its smallest rate hike since its monetary tightening program began in March of 2022.

Slower wage growth and hiring rates are also taking some of the pressure off the Fed even as the unemployment rate has remained at a 50-year low. That’s despite the fact that the labor share of corporate income has fallen over the course of the pandemic, suggesting that wage growth has not been a primary driver of inflation.

“It is abundantly clear that we don’t need mass joblessness to tamp down inflation,” economist Rakeen Mabud of progressive think tank Groundwork Collaborative said in a statement on Friday. “Inflation is cooling and our economy remains strong. Yet the Fed is hell-bent on boosting rates further and putting millions of workers in jeopardy.”

“Avoiding a devastating and completely unnecessary recession is simple: stop raising interest rates,” she added.

After fourth-quarter U.S. gross domestic product came in at a stronger-than-expected 2.9 percent, President Biden touted the state of the economy in a speech on Thursday to a heating, air conditioning and electrical union in Virginia.

“Over the past six months inflation has gone down every month and God willing will continue to do that,” he said.

House Republicans have been sounding a more skeptical tone about the economy.

“Underlying demand and investment remains weak and half of the growth was really due to an increase in inventories,” House Ways and Means Chairman Jason Smith (R-Mo.) said in a statement on fourth-quarter GDP numbers.

This story was updated at 10:30 a.m.

Sylvan Lane contributed to this developing story