An inflation gauge closely monitored by the Federal Reserve showed minimal growth last month, indicating a cooling of price pressures following two months of significant increases. The latest report from the Commerce Department revealed a mere 0.1% rise in prices from October to November. Excluding volatile food and energy categories, prices also saw a modest uptick of 0.1%, following two consecutive months of larger 0.3% gains.
These subdued inflation figures come on the heels of the Federal Reserve's announcement that they now anticipate reducing their key interest rate only twice in 2025, down from the previously projected four cuts. Federal Reserve Chair Jerome Powell attributed this shift to the potential impact of persistent inflation, which could prompt the central bank to scale back on anticipated rate cuts, potentially keeping mortgage rates and consumer borrowing costs elevated.
While year-over-year inflation in November inched up to 2.4% from 2.3% in October, slightly surpassing the Fed's 2% target, core prices, excluding food and energy costs, remained steady at 2.8%. The Fed places greater emphasis on core figures as a more reliable indicator of future inflation trends.
The Commerce Department's report also indicated a 0.4% increase in consumer spending from October to November, underscoring the continued strength of household-driven economic growth. This aligns with the recent government report of a healthy 3.1% annual economic growth rate last quarter, largely fueled by robust consumer demand.
Despite the modest inflation figures, the Fed's decision to lower its benchmark interest rate was influenced by the personal consumption expenditures price index, which is approaching the Fed's target more closely than the consumer price index. The core CPI stood at 3.3% in November, higher than the PCE index.
While the Fed remains committed to addressing inflation, it acknowledges the gradual decline in inflation rates over time. The Fed's strategy to combat inflation involves incrementally raising borrowing costs to temper spending and growth.
Looking ahead, policymakers have revised their inflation expectations for 2025 to 2.5%, slightly above the current rate, with core prices projected to decrease to the same level by the end of next year. Powell emphasized the importance of continued progress on inflation as the Fed considers further rate adjustments.
Following a series of rate cuts, the Fed reduced its benchmark rate by a quarter point to approximately 4.3% in its latest move. The Fed's preference for the PCE index over the CPI stems from the former's ability to reflect changes in consumer behavior during inflationary periods, such as shifts to more affordable products.
In summary, the recent economic data suggests a balanced approach by the Fed in navigating inflation concerns while supporting economic growth through strategic monetary policy adjustments.
