Fed's preferred inflation gauge may fall below policymakers' forecasts
According to the latest data from the U.S. Bureau of Economic Analysis, the Fed's preferred inflation gauge—the personal consumption expenditures (PCE) price index excluding food and energy—rose 2.8% year over year in November, below Fed officials' earlier forecast of 3% for 2025. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, expects inflation to continue running below the committee's expectations. The market widely anticipates that the Fed will hold interest rates steady after its meeting concluding on January 28, but may cut rates once or twice during the year.
Key Points
- Data released Thursday by the U.S. Bureau of Economic Analysis showed that the Federal Reserve's preferred inflation gauge—the personal consumption expenditures (PCE) price index excluding volatile food and energy prices—is on track to fall below policymakers' forecast of 3% for full-year 2025.
- According to BEA data, the core PCE price index rose 2.8% year over year in November, below the 3% forecast by Fed officials last month. The Federal Open Market Committee (FOMC) seeks to keep long-term inflation at a 2% target.
- "Given relatively low tariff revenue, minimal momentum in new rents, and signs that wage growth will slow further, we expect inflation to continue running below the Committee's expectations this year," Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said in a report.
In-Depth Analysis
According to the CME Group's FedWatch tool—a measure based on interest rate futures traders' bets—policymakers may hold the federal funds rate in a range of 3.5% to 3.75% after their two-day meeting ending January 28. Most traders expect one or two 25-basis-point cuts in the main rate this year.
The latest PCE data aligns with data released last week by the Bureau of Labor Statistics, which showed the core Consumer Price Index (CPI) rose 0.2% month over month in December and 2.6% year over year, matching a four-year low for the annual increase.
Citing vulnerabilities in the labor market, policymakers cut the main interest rate three times between September and December last year, each time by 25 basis points.
These reductions in borrowing costs are far smaller than the rate cuts President Donald Trump has sought for months. He has repeatedly called on Fed Chair Jerome Powell to lower the main rate to as low as 1%.
"Inflation has been defeated," Trump said Wednesday in a speech at the World Economic Forum. He added: "Some stupid people like Powell, they raise interest rates. All they do is stop you from succeeding. They're too afraid of inflation."
According to the Fed's Beige Book economic report released ahead of the policymaking meeting, prices rose at a moderate pace in the vast majority of the Fed's 12 districts in recent months. The report said only two districts reported modest price increases, noting that "tariff-related cost pressures were a common theme across all districts."
The Beige Book showed: "Some business contacts that initially absorbed tariff-related costs began passing them on to customers as pre-tariff inventories ran down or pressure to maintain margins intensified." The report also noted: "Looking ahead, businesses expect price growth to moderate somewhat, but prices are expected to remain elevated while increased costs are absorbed." Powell said last month that price spikes triggered by import tariffs could fade by early in the third quarter.