The Federal Reserve’s preferred measure of inflation rose again in December, largely driven by higher energy and food prices. However, a key indicator of underlying inflation trends suggested some progress in curbing price increases.
According to new Commerce Department data released Friday, the Personal Consumption Expenditures (PCE) price index increased 2.6% year over year in December, up from a 2.4% rise in November.
On a monthly basis, prices climbed 0.3%, compared to a 0.1% increase in November.
This acceleration aligned with economists’ expectations, which projected a 0.3% monthly rise and a 2.6% annual increase, based on FactSet consensus estimates.
The core PCE price index, which strips out the more volatile categories of gas and food, matched forecasts exactly: It rose 0.2% from November, while the annual underlying inflation rate remained at 2.8% for the third consecutive month, the report showed.
Inflation has declined significantly since peaking in the summer of 2022, with that progress continuing through 2024. As Joe Biden’s presidency came to a close, the possibility of a sought-after “soft landing”—achieving price stability without pushing the economy into a recession—remained within reach.
Consumers Are Increasing Spending
The PCE price index is part of the Commerce Department’s monthly Personal Income and Outlays report, which provides a detailed look at how Americans earn, spend, and save.
In December, consumer spending surged. Spending jumped 0.7% from November, surpassing economists’ predictions of a 0.5% increase.
A late Thanksgiving meant much of the holiday shopping season was concentrated in December. Additionally, some of the increased spending was likely due to replacement purchases of cars, furniture, and other goods damaged by the two major hurricanes that struck in October 2024, Gregory Daco, chief economist at EY-Parthenon, told on Friday.
Another factor influencing spending may have been anticipation of tariffs threatened by President Donald Trump, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note to clients Friday.
Purchases of televisions, tech products, and automobiles have notably surged, he observed. On Thursday, Trump reiterated his plan to impose a 25% tariff on imports from Canada and Mexico.
“Consumers shop with an eye on bargains, and 25% tariffs of the imports of America’s two largest trading partners could force prices of store-bought goods well beyond the reach of many if not all consumers,” economist Chris Rupkey of FwdBonds wrote in a commentary on Friday. “There may not be another full-blown cost of living crisis, but the future with tariffs certainly looks less affordable for all Americans.”
“We are not sure the country is willing to pay the price for the new administration’s social goals of stopping migrants and illicit drugs at the border,” he added.
FED Inflation GaugeBut They’re Saving Less
The pace of consumer spending may not be sustainable, Tombs warned.
Data from the Commerce Department revealed that the personal saving rate—savings as a percentage of after-tax income—fell to its lowest level in two years. The saving rate dropped to 3.8% in December, down from 4.1% in November, according to the report.
“It now is 2 percentage points below its 2015-to-19 average,” Tombs noted.
Consumers are also relying more heavily on credit cards. The share of people making only the minimum payment on their credit cards reached a 12-year high, according to third-quarter 2024 data from the Federal Reserve Bank of Philadelphia.
“It’s an orange flag,” EY-Parthenon’s Daco told . “We’re noticing that there is a bifurcation in the consumer outlook in that the consumers at the lower-to-medium end of the income spectrum are spending more judiciously in a high-price, high-interest-rate environment.”
Much of the strength in consumer spending has been driven by higher-income individuals, he noted.
Overall, personal income rose 0.4% in December, slightly outpacing the 0.3% gain recorded in November, according to Friday’s report.
“The monthly numbers add some more light on the income side of the economy,” Eugenio Alemán, chief economist at Raymond James, wrote Friday. “This showed that consumers are deploying their savings to ‘keep up with the Joneses,’ which could become a problem down the line.”
Slowing Inflation on the Horizon—For Now
Friday’s release marked the final inflation report for 2024. While data from the fourth quarter indicated a “bump in the road,” Daco emphasized that underlying economic conditions remained disinflationary.
That trend is expected to continue in the early months of this year, he said, pointing to several factors contributing to cooling inflation: cautious consumer spending, limited pricing power among businesses, strong productivity growth, easing shelter cost inflation, slowing insurance-related inflation, and moderating wage growth.
(Separately, on Friday, the Bureau of Labor Statistics reported that workers’ compensation grew 3.8% for the year ending in December, slightly down from the 3.9% rate recorded in September.)
However, inflationary risks have increased compared to the pre-election period, Daco cautioned.
“As we look further out, then you might start to see the pressures from some of the policies that are put in place—immigration restrictions; perhaps even some deregulation; and tariffs, of course, are big, big unknowns,” he said. “But their effect on the economy is likely to take a bit more time.”
The path to the Federal Reserve’s 2% inflation target was always expected to be lengthy and unpredictable. The past couple of months have seen some turbulence, prompting the central bank to take a more measured approach to interest rate cuts in 2025.
Federal Reserve Chair Jerome Powell said Wednesday that while inflation remains elevated, the labor market is strong and the economy is resilient, meaning there is no urgency to accelerate rate cuts. He also noted that policymakers are adopting a wait-and-see approach as Trump’s economic policies take shape.
