Key Fed measure shows core inflation at 2.8%, in line with expectations

Inflation closed out 2024 on a strong note, as a price gauge the Federal Reserve focuses on came in well above the central bank's target, the Commerce Department reported Friday.

The personal consumption expenditures price index increased 2.6% on a year-over-year basis in December, 0.2 percentage point higher than the November reading and in line with the Dow Jones estimate.

Excluding food and energy, core PCE registered a 2.8% reading, also meeting expectations and the same as the prior month. Though the Fed considers both readings, historically officials have seen core as the better gauge of long-run inflation.

On a monthly basis, headline PCE rose 0.3% while core increased 0.2%, both in line with forecasts as well.

The Fed targets annual inflation at 2%, a level the price gauge has not seen since February 2021.

Food prices increased just 0.2% on the month, but energy jumped 2.7%. Durable goods prices, which include items such as aircraft, appliances and electronics, showed deflation, falling 0.4%. Nondurables saw a 0.5% increase.

The report comes two days after the central bank voted unanimously to hold its key interest rate in a range between 4.25%-4.5%, taking a break after three consecutive cuts totaling a full percentage point.

"Inflation is still firmly above the Federal Reserve's 2% target. While Friday's PCE print was in-line with expectations, the data shows that inflation remained elevated in December to end 2024, making it somewhat ironic that the Federal Reserve cut interest rates during the same month," wrote Clark Bellin, chief investment officer at Bellwether Wealth.

In remarks delivered Friday morning, Fed Governor Michelle Bowman said she expects inflation to decelerate through 2025, but thinks the central bank should stay on hold until there are clear signs that is happening.

"There is still more work to be done to bring inflation closer to our 2 percent goal. I would like to see progress in lowering inflation resume before we make further adjustments to the target range," Bowman said in remarks before business leaders in Portsmouth, New Hampshire. "I do expect that inflation will begin to decline again and that by year-end it will be lower than where it now stands."

The report Friday also showed that personal income increased 0.4% in December as forecast, while spending rose 0.7%, or one-tenth of a percentage point ahead of the estimate.

In related news, the Bureau of Labor Statistics reported Friday that the employment cost index rose at a seasonally adjusted 0.9% in the fourth quarter of 2024, in line with expectations though slightly ahead of the third-quarter reading. On an annual basis, the ECI increased 3.8%, one-tenth of a point below the Q3 reading.

Correction: Consumer spending rose 0.7% in December. An earlier version misstated the metric.