Price Increases and Strong Consumer Spending Hinder Federal Reserve Rate Cut Expectations
WASHINGTON, D.C. - Consumer prices rose in December, while spending surged, indicating the Federal Reserve (Fed) may postpone interest rate cuts this year.
The Commerce Department's Bureau of Economic Analysis reported a 0.3% increase in the personal consumption expenditures (PCE) price index in December, meeting economists' forecasts. Over the past 12 months, the PCE price index climbed 2.6%, up from 2.4% in November.
The data, included in the advance gross domestic product report, suggested rising price pressures amid robust consumer spending in the fourth quarter. The Fed monitors PCE price measures for monetary policy.
Despite reducing its benchmark overnight interest rate by 100 basis points since September, the Fed maintained its range of 4.25%-4.50% at its Wednesday meeting. The accompanying statement omitted previous references to inflation "progressing" towards the Fed's 2% target, indicating no rate cuts are expected before June.
Excluding volatile food and energy components, the core PCE price index increased 0.2% in December and 2.8% over the past 12 months.
Amid uncertainty over the economic impact of President Trump's tax cuts, tariffs, and immigration policies, the Fed has projected only two rate cuts this year, down from four previously forecast.
Tariff concerns have fueled consumer stockpiling, boosting consumer spending to its fastest pace in nearly two years in the fourth quarter, supporting economic expansion. Pre-emptive buying is expected to continue in January.
Consumer spending, which constitutes over two-thirds of U.S. economic activity, jumped 0.7% in December. The fourth quarter saw the economy grow at a 2.3% annualized rate, driven by consumer spending despite drags from inventory depletion and the Boeing strike.
Strong consumer spending in December indicates a positive growth trajectory heading into the first quarter.