While the Federal Reserve has not yet declared victory in its fight to bring inflation back to its 2% target, recent data suggests we may already be there. This past Friday’s report of the Fed’s favorite inflation gauge, the Personal Consumption Expenditures (PCE) index revealed year-over-year inflation in November of 2.6%, down from 2.9% in October and way below the 9.1% peak reached in June 2022. Core PCE (excluding the volatile food and energy sectors) was up +3.2% from a year ago as compared to +3.4% last month. However, over the past six months, core prices rose at an annual rate of only 1.9%.

Even more revealing was the November month-over-month data that showed a -0.1% decline in prices as compared to October and core PCE was up only 0.1%. While one month does not a trend make, a negative number represents potential deflation and if it continues would accelerate pressure on the Fed to start cutting rates sooner than later. Fed Chairman Powell has repeatedly stated that they will keep rates higher for longer, fearing a reignition of inflation from premature easing. We shall see.

The recent inflation data is increasing the odds of a so-called “soft landing” for the economy in which the Fed engineers an economic slowdown without causing a recession. Strength in consumer spending and a resilient labor market are applying countervailing forces that could aid or hinder the Fed in its efforts. If the Fed can pull off a soft landing, it may be able to claw back some of the credibility it lost from its numerous monetary policy missteps throughout the Covid era.  We will get the December PCE report on January 26th providing the Fed with more data over which it can ponder its next move.

Stay tuned!