about 1 month ago • 2 mins
What’s going on here?
The Federal Reserve’s (the Fed) winning inflation gauge came out trumps again, indicating that US price rises slowed down some more in December.
What does this mean?
The last year of inflation doomsaying will have you well acquainted with the Consumer Price Index (CPI). The Fed, though, actually prefers to check the Personal Consumption Expenditure (PCE) data. Both indicate the pace at which prices are changing, but the PCE also includes some more complex adjustments like shoppers swapping to cheaper substitutes. Over the last few months, the PCE has been trending slightly below the CPI. And this release was no different: while the CPI moved slightly higher in December, showing prices rising by 3.4% from the year before, the PCE held steady at 2.6%.
Why should I care?
For markets: Home, sweet homes.
Higher interest rates have made mortgage rates steep enough to stop current homeowners from upgrading their digs. That means few homes are being put on the market – and whenever something is limited edition, it’ll usually fetch a higher price. Now traditionally, lower rates run the risk of higher inflation. But some analysts now think lower interest rates could encourage more homeowners to list their houses and, in turn, calm prices across the market. And because housing costs make up about a third of the CPI, that should take some energy out of inflation, too.
The bigger picture: Back to the drawing board.
The Fed hinted back in December it would cut rates six times in 2024. Ever since that, investors have been expecting the first to land sooner rather than later – after all, six is a lot to squeeze into a year. But with Thursday’s data showing that the US picked up more than expected in the last quarter of the year, and with inflation toeing the line, the central bank may wait it out a while longer.
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