Source: Golden Ten Data

At 21:30 Beijing time on Friday, the US will release PCE data for December. Economists estimate that prices rose slightly in December, but long-term trends showed cooling inflation, strong consumer spending, and revenue growth, all of which contributed to the soft landing of the economy.

Forecasters surveyed by foreign media estimate that the core personal consumption expenditure price index (PCE) in December, which excludes highly volatile food and energy categories, rose 0.2% from the previous month. This increase was higher than 0.1% in November, but it is still in line with sluggish inflation. Economists expect the year-on-year increase in core prices to fall to 3% in December from 3.2% last month.

Another data released on Thursday showed that the US core PCE price index for the fourth quarter slowed to 2%, just meeting the Federal Reserve's target.

Forecasters say consumer spending rebounded in December, up 0.5% from November, compared to 0.2% in November. They said the increase in personal income would fall to 0.3%.

The December report is the last time that Federal Reserve policymakers will review their favorite inflation indicators before the January 30-31 meeting next week. The Federal Reserve expects inflation to fall back to 2.4% by the end of this year, close to its target. Gregory Daco, chief economist at EY-Parthenon, said:

“Any discussion about the Fed cutting interest rates will be linked to positive developments in inflation indicators.”

Has the Federal Reserve's inflation work been completed?

TD Securities believes that the December data may show that the 3-month/6-month growth momentum of core PCE prices has fallen below the 2% target, which will further prove that the worst period of inflation may be over.

As far as this data is concerned, this is unlikely to prompt the Federal Reserve to adjust interest rates at the next meeting, but moderate inflation may leave room for them to consider cutting interest rates this spring. The last time the Federal Reserve raised interest rates was in July of last year, when they raised the federal funds rate to between 5.25% and 5.5%, a new high in more than 20 years.

According to predictions from the last meeting in December last year, Fed officials expect to cut interest rates three times this year, but they have not specified when they will start cutting interest rates.

James Knightley, chief international economist at Dutch International Group, wrote that core PCE data for the fourth quarter confirmed the Federal Reserve's “job done” to control inflation. He said the December data should confirm that the month-on-month price increase was lower than the key 0.17%. This is the speed required for core PCE growth over the next 12 months to reach the Federal Reserve's 2% year-on-year target. Knightley said:

“The Federal Reserve now has a lot of room to cut interest rates. I believe Federal Reserve officials will wait a little longer to cut interest rates to ensure that they have real and real confidence in their ability to cut interest rates.”

The US economy focuses on the labor market

While progress has been made in fighting inflation, the US economy is also growing healthily, with real gross domestic product (GDP) growing by 3.3% in the fourth quarter. This increase was largely driven by consumer spending, which was boosted by easing price pressures, a stable labor market, and the elasticity of wage growth.

Due to a healthy labor market, cooling inflation, and steady wage growth, consumers are on a solid footing as they enter 2024. These factors helped the US economy break most economists' expectations for a recession in 2023. Consumer spending accounts for the largest share of economic growth, and they continue to spend despite continuous increases in interest rates.

Stephen Stanley, chief economist of US capital markets at Santander Bank, said, “By 2024, consumer spending will depend on the fate of the labor market.” Unlike 2021 and 2022, he said, when consumers built up savings as a buffer during the COVID-19 pandemic to fund their spending, now a strong job market and wage growth are driving spending.

According to a recent survey by foreign media, forecasters expect the US economy to continue to grow in 2024, although the growth rate will slow down. Economists surveyed by FactSet expect US GDP growth to slow to 0.8% in the first quarter and 0.6% in the second quarter in the first half of this year. The personal savings rate fell from 4.2% in the third quarter to 4% in the fourth quarter, indicating that some consumers are using their savings to spend more.

Ernst and Young senior economist Lydia Boussour also said that a series of recent unexpected economic data signals suggest that Fed officials will “not rush to cut interest rates in the short term and insist on being careful.” She anticipates that the Federal Reserve will cut interest rates by 25 basis points each time at the FOMC meetings in May, June, September, and December of this year.

Editor/Corrine