Fed’s Preferred Gauge Of Inflation Aligns With Expectations In December: Question Is When Will It Reach Central Bank’s Target

The December personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred gauge of inflation, continued to trend above the central bank’s targeted levels.

According to data by the Bureau of Economic Analysis, PCE rose 2.6% on a year-over-year (YoY) basis in December. The reading stands 0.2 percentage points higher than the November figure but aligns with expectations.

Core PCE index, which excludes food and energy and is considered as a better gauge of long-term inflation, increased 2.8% from a year ago, again in line with expectations.

On a month-on-month basis, the headline PCE price index for December rose 0.3%, and the core PCE price index rose 0.2%.

At the same time, Personal income increased $92 billion or 0.4% at a monthly rate in December while Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—increased $129.5 billion.

Disposable personal income rose 0.4% while personal consumption expenditures (PCE) increased 0.7%.

Equity markets remained fairly stable following the release of the PCE data and held onto the morning gains. The SPDR S&P 500 ETF Trust (SPY) traded 0.52% higher, while the Invesco QQQ Trust, Series 1 (QQQ) gained nearly 2%.

However, retail sentiment on Stocktwits diverged for these ETFs.

SPY's Sentiment Meter and Message Volume as of 10:02 a.m. ET on Jan. 31, 2025 | Source: Stocktwits QQQ's Sentiment Meter and Message Volume as of 10:02 a.m. ET on Jan. 31, 2025 | Source: Stocktwits

In its first policy decision after Donald Trump’s return as U.S. President and after three consecutive rate reductions amounting to a cumulative 1%, the Fed decided to keep its overnight borrowing rate unchanged at 4.25% to 4.5% on Wednesday.

The central bank observed that inflation remains somewhat elevated, the unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.

DoubleLine Capital CEO Jeffrey Gundlach reportedly said he expects two rate reductions by the Federal Reserve at most this year as the central bank awaits key incoming data to assess the situation.

“Maximum two cuts this year. And I mean maximum, I’m not predicting two cuts. I just think that’s the most you can possibly think about,” Gundlach said on CNBC.

Although the PCE price index came in line with expectations, the question remains how long it will take for inflation to fall within the Fed’s targeted levels. That would be crucial in deciding the future rate trajectory.

For updates and corrections, email newsroom[at]stocktwits[dot]com.<