The trend is clear: inflation is declining in America.
The Fed’s preferred measure of inflation showed that price increases continued to moderate in November, providing another welcome indication that a period of painfully high prices may have peaked.
The Commerce Department reported Friday that the personal consumption expenditures price index, or PCE, rose 5.5% in November from a year earlier. This is lower than in October, when prices rose 6.1% annually.
In November alone, prices rose just 0.1% from October.
Core personal consumption expenditures, which exclude the volatile food and energy categories, rose 4.7% annually and 0.2% month over month, matching expectations of economists polled by Refinitiv.
Annual increases for both indicators of personal consumption expenditures inflation are at their lowest levels since October 2021 and are followed by continued declines in other measures of inflation, such as the consumer price index and producer price index.
PCE, specifically the core measurement, is the Fed’s preferred measure of inflation, because it provides a more complete picture of costs to consumers.
Friday’s report also showed that spending continued to rise in November, but at a much slower pace than in previous months. Spending rose 0.1% in November compared to 0.8% in the previous month. Personal income rose 0.4% in November, down from 0.7% in October.
November’s PCE report, the last major inflation measure released in 2022, provided a glimpse of an economy in transition. Tasked with reining in the highest rate of inflation since the early 1980s, the Fed made a series of massive interest rate increases to crush demand.
In its seven meetings starting in March, the central bank’s policy-making arm raised the benchmark interest rate by 4.25 percentage points. The sharp rise in interest rates is beginning to filter through the economy, and its effects are felt first in areas such as real estate, where mortgage rates were 6.27% this week, more than double the rate seen last year at this time, according to Freddie Mac. data.
“The economy is moving in the right direction from a Fed perspective at the end of 2022, but not fast enough,” said Joss Foucher, chief economist at PNC Financial Services, in a statement. “High interest rates are weighing on consumer spending, particularly on durable goods, and inflation is slowing.”
Inflation has eased in recent months, particularly in items such as commodities as supply chain bottlenecks have eased and consumers have focused more on spending in areas such as leisure and hospitality.
However, inflation in the services sector has been more or less “flat”, and has not abated as quickly. Friday’s personal consumption expenditures report showed that the services index posted a monthly increase of 0.4% — unchanged from the October rate — and an annual increase of more than 11%, Foucher noted.
He added that while most service inflation is due to housing costs, which reverse quickly, the Fed is concerned that strong wage growth could lead to sustained increases in service prices and general inflation.
“The FOMC will continue to increase the federal funds rate in early 2023 until it becomes clear that the labor market is slowing, and that wage growth and service inflation are slowing to more sustainable paces,” he added.
The Fed’s latest economic outlook, released last week, showed that board members were expecting inflation to remain slightly higher for longer than previously expected. Fed board members now expect end-2023 personal consumption expenditures inflation to end at 3.1% and core personal consumption expenditures inflation next year to end at 3.5%, above the central bank’s target rate of 2%.
A separate Commerce Department report released Friday showed that new orders for manufactured goods fell 2.1% in November, the largest monthly drop since the start of the pandemic.
According to the report, transportation equipment, specifically new orders for aircraft and non-defense parts, led the decline. Excluding transportation, new orders increased 0.2%.
Shipments increased 0.2% in November, which followed a 0.4% increase in October.
“Orders for core durable goods slowed but did not contract, reflecting growing concern about the economy,” Diane Swonk, chief economist at KPMG, said. chirp Friday after the release of the report. Manufacturing activity is starting to contract and the preliminary reading for December indicates that it will contract further towards the end of the year. A cold winter is expected for the manufacturing sector.
The slow downward march of inflation was welcome news for consumers as well, which helped boost their economic sentiment during the month of December, according to new data released Friday by the University of Michigan.
The final reading of the December consumer confidence index came in at 59.7 in December, up slightly from the preliminary measurement of 59.1 and the final reading for November of 56.8, according to data from the university’s consumer surveys.
“It’s clear that consumers have welcomed the recent easing of inflation,” said Joanne Hsu, director of consumer surveys, in a statement. “While sentiment appears to have turned around from an all-time low since June, consumers have retained the judgment on whether the trends will continue.”
She added, “Their outlook for the economy may have improved, but it remains relatively weak. Sustaining strong consumer spending hinges on continued strength in incomes and labor markets in the coming quarters.”
The report showed the biggest improvement in sentiment about business conditions, while inflation expectations also improved, dropping to 4.4% in December, the lowest reading in 18 months, according to the university. This is a major data point for the Federal Reserve. If consumers believe that prices will remain high, this can lead to an increase in the demand for wages, which may lead to firms raising prices.
Earlier this week, the Conference Board’s Consumer Confidence Index — another measure of consumer sentiment toward the economy — reached its highest measure since April 2022.
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