San Francisco Frontiers - Fed's favored inflation gauge accelerates further in December

The personal consumption expenditures (PCE) price index rose 2.6 percent in the 12 months to December, up from 2.4 percent in November, the Commerce Department said in a statement. Inflation rose 0.3 percent from a month earlier.

This was in line with the median forecasts from economists surveyed by Dow Jones Newswires and The Wall Street Journal.

Stripping out volatile food and energy costs, the so-called core index rose by 0.2 percent from a month earlier, and by 2.8 percent from a year ago.

"The report showed slightly higher inflation, but it was in line with expectations, meaning it won’t disrupt the narrative of a potential Fed rate cut in the first half of the year," Jochen Stanzl, Chief Market Analyst at CMC Markets wrote in a note to clients.

"This reinforces the Fed's reluctance to give clear signals on when it will lower rates and highlights the prudence of maintaining a strict, wait-and-see approach," he added.

- Moving away from 2% -

Headline inflation has been moving away from the Fed's long-term target of two percent since September, causing issues for policymakers at the US central bank.

The Fed has a dual mandate to tackle inflation and unemployment, and does so mainly by raising and lowering short-term lending rates, which then trickle through into consumer and producer borrowing costs.

On Wednesday, the Fed voted unanimously to pause rate reductions following three consecutive cuts, holding the bank's benchmark lending rate at between 4.25 and 4.50 percent.

It did so despite calls from President Donald Trump to "immediately" cut rates shortly after he was sworn into office earlier this month.

While inflation continues to accelerate, economic growth has been strong, and the labor market has remained resilient, with the unemployment rate ticking down to 4.1 percent last month.

"There's still more work to be done to bring inflation closer to our two percent goal," Fed governor Michelle Bowman told a conference in New Hampshire on Friday.

"I would like to see progress in lowering inflation resume before we make further adjustments to the target range," added Bowman, who is a permanent voting member of the Fed's rate-setting Federal Open Market Committee FOMC).

"The last thing you're going to want to do is cut rates now, if inflation is being stubborn, going the wrong way, still above two percent," Allianz Trade senior North America economist Dan North told AFP earlier in the week.

And personal saving as a percentage of disposable personal income eased slightly to 3.8 percent in December from 4.1 percent in November, indicating that consumers saved less of the money they earned last month.

"From the Fed's perspective, these data confirm the FOMC's story that the pace of progress back to the two percent inflation target has slowed," economists at High Frequency Economics wrote in a note to clients published Friday.

Z.Sanchez--SFF