A new reading on the Federal Reserve’s preferred inflation gauge showed prices remained sticky in December, likely leading the central bank to hold interest rates steady.
The Personal Consumption Expenditures (PCE) index on a “core” basis, which excludes volatile food and energy prices, showed prices rose 3% in December, up from 2.8% in November. The reading was two-tenths of a percentage point above economists’ expectations, but in line with what many Fed officials expected. Fed Chair Jerome Powell said during his press conference in January following the policy meeting that he expected PCE on a core basis to hit 3%, as have other members of the central bank.
The PCE data stands in contrast to another inflation measure — the Consumer Price Index for January — which showed that prices on a core basis rose 2.5%.
“With the Fed more focused on the core PCE inflation measure, however, we doubt that the majority of Fed officials would be willing to consider additional interest rate cuts at the next couple of policy meetings,” said Paul Ashworth, chief North America economist for Capital Economics.
As of December, inflation based on PCE was back to a full percentage point above the Fed’s 2% goal.
Chicago Fed president Austan Goolsbee told Yahoo Finance last week that if inflation is 3% or above, then the level at which interest rates are restricting the economy, accounting for inflation, is “not high.”
“I think let’s just be a little circumspect [before] making pronouncements about where rates are going to settle until we’re clear that the inflation rate is settling back at 2%,” he said.
Fed governor Michael Barr said Tuesday that he needs to see inflation sustainably drop before cutting interest rates and said he sees holding rates steady for “some time.”
Barr said he believes inflation remains elevated at 3% based on PCE, as tariffs have pushed up goods prices. Looking ahead, he said it’s “reasonable” to expect the impact of tariffs on inflation to begin to lift later this year, but he cautioned that there are “many reasons to be concerned that inflation will remain elevated.”
“I see the risk of persistent inflation above our 2% target as significant, which means we need to remain vigilant,” Barr said.
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The issue of tariffs was thrown into turmoil on Friday with a 6-3 Supreme Court ruling striking down a major section of President Trump’s tariff regime.
Minutes from the Fed’s January policy meeting released this week revealed most Fed officials cautioned that progress toward their 2% inflation goal might be slower and more uneven than expected and that the risk of inflation running “persistently” above 2% was “meaningful.”