Dec 22, 2023 - Economy

Fed's favored inflation gauge shows overall prices fell in November

Shoppers inside an Ulta Beauty last month in New York. Photo: Bing Guan/Bloomberg via Getty Images

The Federal Reserve's go-to inflation index declined 0.1% in November, the first monthly drop in overall prices by this measure in over three years.

Why it matters: The data from the Commerce Department is the freshest sign of cooling inflation that came alongside solid consumer spending and rising income.

  • President Biden called the news a "significant milestone," but he added that "work is far from finished."

By the numbers: The Personal Consumption Expenditures price index rose 2.6% from the same month a year ago — edging closer to the 2% sweet spot that Fed officials target. In October, it rose 2.9% from a year ago.

  • The index's monthly drop of 0.1% in November came as energy prices plummeted by 2.7% and food prices decreased 0.1%.
  • Excluding volatile food and energy prices, the so-called core index rose 3.2% from one year ago. compared to the 3.4% rise in October. For November, the index rose by just 0.1%.

The big picture: Consumer spending rose by 0.2% with strong spending on goods including recreational vehicles, clothing, footwear and furniture. Meanwhile, shoppers splurged at restaurants.

  • Excluding inflation, consumer spending was up by 0.3% — a quicker pace than the 0.1% in October.

That spending was supported by rising disposal income, which rose 0.4% — even when accounting for inflation. It picked up from the 0.3% rise in October.

  • The personal saving rate — what's leftover after disposable personal income is spent — rose a tick to 4.1%.

Between the lines: Fed chair Jerome Powell hinted earlier this month that the central bank would like to pivot to interest rate cuts, with officials' forecasts signaling at least three cuts next year.

  • The data released on Friday provides an ideal backdrop for those forecasts: core PCE rose at a 1.9% annualized rate over the last six months — below the Fed's 2% target.
  • And over the past three months, core PCE rose at a 2.2% annualized rate.
  • In other words, the war on inflation looks close to won — at least by this measure.

What they're saying: "The case for some modest rate reductions in 2024 linked to inflation approaching the target rate continues to strengthen," economists at Brean Capital wrote in a note.

The bottom line: The report shows the ideal combination for the Federal Reserve: inflation returning to pre-pandemic norms as the economy (for now) remains steady and consumer spending is healthy.

Editor's note: This story has been updated with additional details throughout.

Go deeper