Even so, the PCE index drifted further away from 2% goal and inflation still hasn’t returned to low pre-pandemic levels.
The barometer of U.S. inflation favored by the Federal Reserve rose more slowly than expected in November, breaking what appears to a gradual drift higher in prices that forced the central bank to scale back plans to cut interest rates.
The PCE index increased a scant 0.1% last month, the government said Friday. That’s the smallest rise in three months and just half as much as predicted by economists polled by The Wall Street Journal.
Yet the increase in inflation in the past 12 months inched up to 2.4% from 2.3%, pushing it further away from the Fed’s 2% target.
The core rate that strips out food and energy, meanwhile, also rose 0.1% last month and came in below forecast. The core PCE index is viewed by the Fed as the best predictor of future inflation.
The increase in the core past 12 months was unchanged at 2.8%.
The PCE report came out two days after the Fed’s last big meeting of the year that ended with another interest-rate reduction. Fed officials were already aware of what the inflation report was likely to show.
Fed officials still aren’t expecting inflation to cool off quickly to their 2% goal, however. They raised their forecast for inflation to 2.5% in 2025 from an estimated 2.4% at the end of this year.
Even though Fed officials believe inflation will remain sticky, they cut interest rates again on Wednesday. Their big worry: rising unemployment.
“What I hear more than you would think is, don’t get one-tenth off inflation and break the economy,” San Francisco Fed President Mary Daly said Friday in an interview on Bloomberg. “I don’t want to see a rise in the unemployment rate just to get a quarter (three months) ahead on our 2% goal.”
Fed Chairman Jerome Powell on Wednesday said rates are still high enough to slow inflation. He also indicated somewhat lower borrowing costs would help prevent the unemployment rate from rising any higher.
Investors don’t expect any more rate cuts until the spring at the earliest. The Fed indicated on Wednesday it only plans to reduce rates twice in 2025 instead of four times as it predicted last fall. The more cautious strategy triggered the worst one-day selloff in stocks in months.
