The Economy

Inflation Edges Closer to Fed’s 2% Target

The Fed’s preferred measure of inflation rose 1.6% in December from a year earlier, its highest level since September 2014.
Matthew HellerJanuary 31, 2017
Inflation Edges Closer to Fed’s 2% Target

U.S. consumer spending rose solidly last month while, in another sign of economic growth, the Federal Reserve’s preferred measure of inflation reached its highest level in more than two years.

The Commerce Department said Monday that personal consumption increased 0.5% after gaining 0.2% in November. The gain was the biggest in three months and in line with economists’ expectations.

According to Reuters, spending accelerated as households bought motor vehicles and cold weather boosted demand for utilities amid a rise in wages.

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“Consumers keep on spending to help the economy grow and inflation is stirring,” said Chris Rupkey, chief economist at MUFG Union Bank in New York. “The economy is at full employment. Time for the Fed to hoist sail on interest rates.”

In December, the personal-consumption-expenditures (PCE) price index advanced 0.2% from the prior month and rose 1.6% from a year earlier, a 12-month increase last seen in September 2014.

The Fed’s preferred measure is still below its 2% inflation target but The Wall Street Journal said the report provides “fresh evidence of firming prices a day before policy makers meet to discuss the path of interest rates this year.”

Excluding the volatile food and energy categories, the so-called core PCE price index increased 1.7 percent last month on a year-on-year basis after a similar gain in November, while the consumer price index is currently at 2.1% on a year-on-year basis.

“Inflation will gradually accelerate over the next couple of years due to higher energy prices and stronger wage growth that leads firms to raise prices,” PNC Bank economist Gus Faucher predicted.

In December, Fed policy makers’ median projection for annual headline inflation in late 2017 was 1.9%.

The report also showed that consumer spending on long-lasting goods, such as cars and appliances, rose 1.4% in December, while spending on goods that are used more quickly, including gasoline and clothes, increased slightly. At 0.4%, spending on services maintained the same pace recorded for much of 2016.

“Consumer spending could get a boost from the Trump administration’s promise to cut taxes,” Reuters said.

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