The Personal Consumption Expenditures index—the Federal Reserve’s preferred inflation gauge—came in at 2.9% for December, beating economists’ estimates. This is the first time since March 2021 that the index has fallen below 3%, prior to the Fed’s most aggressive interest rate hiking campaign since the 1980s.
The “core” index, which excludes volatile food and energy prices, fell to 1.5% on a three-month annualized basis—its lowest since late 2020—while remaining at 1.9% for a second month in a row on a six-month basis. Both measures fell below the Fed’s 2% inflation target.
Given that such inflation figures fall in line with what the Fed would want to hear, some traders are holding onto their optimism that a rate cut is incoming despite indications from some Fed policymakers that the central bank may continue to hold rates constant. Markets are pricing a 46% chance that the Fed will introduce a rate cut in March, a slight drop from the 56% last week.