The inflation news arrived as an early Christmas present
Market participants anticipate a rate cut as early as the March 19-20 FOMC meeting.
December 22, 2023
Personal disposable incomes rose 0.4% in November after adjusting for inflation, following a 0.3% rise in October. A stronger labor market lifted incomes during the month, helping to propel spending and allowing households to save funds as well.
Personal consumption expenditures (PCE) rose 0.3% after adjusting for inflation, which follows a downwardly revised +0.1% in October. The savings rate edged higher to 4.1% from 4.0%. Households continue to have a large cushion of excess savings, estimated at $1.3 trillion in November, the same level as October.
The inflation news arrived as an early Christmas present. Overall inflation posted the first monthly decline since the COVID recession and came in under market expectations for no change. The PCE index fell 0.1% in November, the first drop since April 2020’s -0.4%.
The core PCE index, which excludes food and energy and is regarded as the best predictor of future inflation, rose 0.1%, below the consensus expectation of 0.2%. Perhaps more significantly, the six-month annualized change for the core index registered 1.9%, below the Fed’s target of 2%. The three-month annualized change, another measure of momentum for underlying inflation, rose 2.16% in November, effectively at the Fed's target.
The super-core PCE index, which is seen as a gauge of services inflation, also rose 0.1% in November, the same as October. On an annualized basis, the super-core index fell to 3.5% from 3.8%.
In the Fed’s Summary of Economic Projections for December 2023, PCE inflation was projected at 2.8% for 2023 (measured fourth quarter to fourth quarter) while core PCE inflation was 3.2%. In November, the annual rate of inflation for the PCE index was 2.6% and 3.2% for core PCE, running in line or below the Fed's projections for the fourth quarter.
We see Fed officials as hesitant to ease rates so soon for fear of backtracking on the hard-won fight against inflation.
Ken Kim, KPMG Senior Economist
Bottom Line:
After today’s encouraging news on inflation, the tug of war between financial markets and the Federal Reserve is expected to continue into the new year. This week, a number of Fed officials have pushed back against financial market expectations for an imminent rate cut. Market participants anticipate a rate cut as early as the March 19-20 FOMC meeting. We think the Fed will ease policy in May. The front-running of rate cuts by financial markets has sent bond yields sharply lower, which could spark economic activity and stall progress on inflation. For now, we see Fed officials as hesitant to ease rates so soon for fear of backtracking on the hard-won fight against inflation that the economy has achieved so far.
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