Recent economic projections signal a challenging outlook for inflation, with the Personal Consumption Expenditures (PCE) index, a critical gauge closely monitored by the Federal Reserve, expected to show a rise for December. This persistent inflationary pressure could potentially influence the central bank's decisions regarding interest rate adjustments, prolonging higher borrowing costs and impacting household finances.
December Inflation Forecast: PCE Rises, Fed's Target Remains Elusive
As the Bureau of Economic Analysis prepares to release its latest report, economists surveyed by Dow Jones Newswires and The Wall Street Journal anticipate that consumer prices, as measured by the Personal Consumption Expenditures (PCE), likely increased by 2.8% over the 12 months ending in December. This figure mirrors the annual growth observed in November, indicating a consistent upward trend.
A more concerning aspect is the forecast for "core" PCE, which strips out the volatile categories of food and energy. Experts project this measure to climb to 3.0%, a slight increase from November's 2.8%. Both the overall and core PCE figures are expected to be marginally higher than those recorded in January of the previous year (2025). The predicted rise in core PCE is particularly noteworthy, as it serves as the Federal Reserve's primary benchmark for its annual inflation target of 2%. The continuous exceeding of this target since 2021 highlights the entrenched nature of current inflationary forces.
This anticipated data release on a Friday holds significant weight, as it could temper the recent market optimism sparked by a promising slowdown reported in the Consumer Price Index (CPI) for January. While the CPI offered a glimpse of potential improvement, the expected PCE figures suggest that the broader inflationary landscape remains challenging.
Forecasters, including economists at Goldman Sachs, predict that the annual PCE measure will continue its upward trajectory, reaching as high as 3.05%. This increase is partly attributed to companies passing the costs of tariffs onto consumers. This projection, if accurate, would mark the highest PCE level since March 2024, further underscoring the ongoing battle against inflation. (It is important to note that PCE reports are currently being released with a one-month delay due to a government shutdown last year, meaning the January PCE report will be published in March.)
Federal Reserve officials will meticulously scrutinize forthcoming inflation data, particularly the PCE, to inform their decisions on whether to lower borrowing costs to stimulate employment or maintain higher rates to bring inflation back to its 2% objective. The current market consensus, according to the CME Group's FedWatch tool, anticipates the Fed initiating a quarter-point cut to the federal funds rate in June.
However, some economists express caution. Justin Weidner and his team at Deutsche Bank emphasize that with inflation consistently above target for nearly five consecutive years, policymakers will require greater clarity on inflationary trends before implementing further rate reductions. This perspective is reinforced by the receding downside risks in the labor market, strengthening the view that the Fed may postpone additional rate cuts until later in the year.
The current economic climate underscores the intricate balance the Federal Reserve must maintain between fostering job growth and curbing inflation. The persistent elevation of the PCE index, particularly its core component, serves as a stark reminder of the long and winding road ahead to achieving price stability. Businesses and consumers alike will continue to feel the pinch of higher costs, influencing spending patterns and investment decisions. The coming months will be crucial in determining the trajectory of inflation and the Fed's ultimate response, shaping the economic landscape for the foreseeable future. A delicate and strategic approach is paramount to navigating these complex financial waters, aiming to stabilize the economy without stifling growth.
