The Federal Reserve’s preferred inflation measure, Personal Consumption Expenditures (PCE), met estimates in December. Headline PCE rose 0.3% from November, with the year-over-year rate climbing from 2.4% to 2.6%. Core PCE, which excludes volatile food and energy prices, increased 0.2% monthly, while the annual rate held steady at 2.8% – near the lowest level in over three years.
What’s the bottom line?
Shelter costs, which comprise 18% of Core PCE, play a crucial role in progress toward the Fed’s 2% inflation target. While shelter costs in PCE have been elevated when compared to more real-time rental data from places like Apartment List and CoreLogic, they have started to align more favorably in the government’s report. As PCE better reflects softer real-time rental trends, annual inflation readings should decrease.