What's happened
The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, fell by 0.1% in November, marking the first decline since April 2020. Year-over-year, the PCE index rose by 2.6%, down from 2.9% in October. Core PCE, which excludes food and energy prices, increased by 0.1% month-over-month and 3.2% year-over-year. This cooling inflation trend has led to speculation that the Federal Reserve may cut interest rates in 2024.
Why it matters
This development is significant as it indicates that inflationary pressures in the US are easing, which could lead to lower interest rates in the near future. For consumers, this could mean reduced borrowing costs and potentially lower prices for goods and services. For businesses, it could signal a more stable economic environment, encouraging investment and growth. On a broader scale, the Federal Reserve's ability to control inflation without triggering a recession is crucial for maintaining economic stability.
What the papers say
According to Courtenay Brown of Axios, the 0.1% decline in the PCE index is a fresh sign of cooling inflation, accompanied by solid consumer spending and rising income. Jeanna Smialek of the New York Times highlights that the decline in inflation is good news for the Federal Reserve and the White House, as it suggests a soft economic landing is possible. The NY Post notes that the figures bolster bets that the Federal Reserve will begin cutting interest rates next year, with projections indicating potential rate cuts by as much as 75 basis points in 2024.
How we got here
Inflation has been a significant concern for the US economy, particularly following the economic disruptions caused by the COVID-19 pandemic. The Federal Reserve has been aggressively raising interest rates to combat rising prices, with 11 rate hikes since last year. These efforts have brought inflation down from its peak of 9.1% in June 2022 to 3.1% in November 2023, according to the latest Consumer Price Index reading. The recent decline in the PCE index suggests that these measures are starting to take effect.
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