(Bloomberg) -- The Federal Reserve’s preferred measure of underlying inflation remained muted in December and real incomes were soft, which should support further reductions in interest rates this year.
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The so-called core personal consumption expenditures price index, which excludes food and energy items, rose 0.2% from November and 2.8% from a year earlier, according to Bureau of Economic Analysis data out Friday.
However, real disposable income barely rose for a second month. That may be pressuring consumers to dip into savings more, as the saving rate fell to 3.8%, the lowest in two years.
That’s far below the pre-pandemic average, “putting the consumer in a precarious position if incomes weaken,” Jeffrey Roach, chief economist LPL Financial, said in a note.
On a three-month annualized basis — a metric economists say paints a more accurate picture of the trajectory of inflation — the core PCE price gauge advanced 2.2%, the least since July.
The data should help temper concerns about inflation rearing back up again after a brief acceleration in prior months. Fed Chair Jerome Powell, speaking after the central bank held rates steady Wednesday, said officials need to see more progress toward their 2% target before resuming lowering borrowing costs — and they’re wary of uncertainties over President Donald Trump’s policies.
Stock futures remained higher and Treasury yields fluctuated after the report. Separate data released at the same time showed US labor cost growth cooled, rising in the fourth quarter by the least since 2021.
In the PCE report, core services prices — a closely watched category that excludes housing and energy — rose 0.3% from a month earlier, similar to readings in prior months. Core goods prices — excluding food and energy — fell 0.24%, the most on an unrounded basis in a year.
A measure which strips out imputed prices, known as the “market-based” core PCE index, rose 0.1% for a second month and 2.4% from a year earlier. Fed officials have referenced that metric as a better indicator of supply and demand than the overall measure in recent months.
In prepared remarks Friday before the PCE data, Fed Governor Michelle Bowman said she wants to see additional progress on inflation before the central bank lowers interest rates further, and questioned how restrictive policy might be given the economy’s strength.