Summary: US Fed’sfavoured inflation measure increases by 0.5% in December; in line with expectations; annual rate accelerates from 4.7% to 4.9%; highest core reading since September 1983; Treasury bond yields down moderately.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since ran up well above 3% during the June and September quarters.
The latest figures have now been published by the Bureau of Economic Analysis as part of the December personal income and expenditures report. Core PCE prices rose by 0.5% over the month, in line with expectations as well as November’s increase. On a 12-month basis, the core PCE inflation rate accelerated from November’s revised rate of 4.7% to 4.9%.
“That was the highest PCE data on a headline and core basis since February 1982 and September1983 respectively,” said ANZ Head of Australian Economics David Plank.
US Treasury bond yields fell moderately on the day. By the close of business, 2-year and 10-year Treasury bond yields had both shed 3bps to 1.16% and 1.77% respectively while the 30-year yield finished 2bps lower at 2.07%.
In terms of US Fed policy, expectations for a higher federal funds rate over the next 12 months softened slightly with respect to months prior to July but hardened a little with respect to later months. At the close of business, March contracts implied an effective federal funds rate of 0.225%, 15bps higher than the current spot rate while June contracts implied 0.665%. February 2023 futures contracts implied an effective federal funds rate of 1.335%, 125bps above the spot rate.
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.