Economic Growth Remains Strong as Inflation Cools
The latest report from the Commerce Department has brought welcome news for the economy, with a key inflation gauge showing a significant slowdown in price pressures. The personal consumption expenditures price index, closely watched by the Federal Reserve, rose a mere 0.1% from October to November, a marked decrease from the previous two months.
Consumer Spending Remains Robust
Despite the modest inflation figures, consumers continued to drive the economy forward, increasing their spending by a solid 0.4% from October to November. This is a promising sign, especially considering the government’s report on Thursday that the U.S. economy grew at a healthy 3.1% annual rate last quarter, largely thanks to consumer demand.
Incomes Rise Faster Than Prices
In another positive development, incomes rose 0.3% last month, outpacing price growth. If this trend continues, it should help Americans adjust to higher costs. Federal Reserve Chair Jerome Powell has emphasized the importance of making progress on inflation, and this development is a step in the right direction.
Fed’s Preferred Inflation Gauge
The personal consumption expenditures price index is the Fed’s preferred measure of inflation, and it has been trending downward over time. From a peak of 7.2% in June 2022, it has fallen to 2.1% in September. While there is still work to be done, the Fed is encouraged by this progress.
Interest Rate Cuts on Hold
The Fed’s decision to cut its benchmark interest rate by a quarter point to about 4.3% on Wednesday was seen as a sign that it is taking a more cautious approach to rate cuts. With inflation still above the Fed’s 2% target, policymakers are hesitant to reduce rates further, fearing it could fuel inflation.
Core Prices Remain Sticky
One area of concern is the year-over-year “core” prices, which exclude volatile food and energy costs. These prices remain unchanged at 2.8%, above the Fed’s target. While the overall inflation picture is improving, the Fed is keeping a close eye on these core prices, which are seen as a better indicator of future inflation trends.
Economic Growth Engine Humming Along
As the holiday season approaches, economists are breathing a sigh of relief. “We can break for the holidays with the comfort that the economy’s growth engine is humming along,” said Oren Klachkin, an economist at Nationwide Financial. The Fed, too, is taking a more optimistic view, but remains cautious about inflation.
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