US PCE inflation well above target

Latest price data make uncomfortable reading for the Fed in view of bold recent rate cuts and President-elect Trump’s stated policies.

27 November 2024

The US Core Personal Consumption Expenditures (PCE) price index climbed by a robust 2.8% on the previous year, and 0.3% on the previous month. The 12-month gain for this inflation measure remains significantly above the Federal Reserve’s (Fed) official 2% target and is starting to make the US central bank’s rate cuts of September and November look like unnecessary moves in dire need of a convincing narrative.

The minutes of the Federal Open Market Committee’s early November meeting have the whiff of panic about them, revealing Chair Powell, Dallas Fed President Logan and Governor Bowman all suddenly suggesting there is no rush to keep cutting rates, having cut them by a cool 75 basis points (bps) in just over two months. Of course, the recent election increases the possibility that they will have to slow, or even halt, the policy easing trajectory, with even the prospect of a humiliating U-turn as President-elect Trump unleashes fresh inflationary forces from three quarters: (1) Expelling undocumented migrants (who make up a large part of America’s sizeable hospitality and services sectors), (2) Renewing 2017’s tax cuts (even though the economy is already growing at a decent near-3% annualised clip) and (3) Imposing punitive tariffs on China, Mexico and even Canada, ostensibly to curb migration but also deal with the inflow of narcotics (even though those countries supply much of what US consumers buy).

If riding out the occasional awkward inflation print was tactically acceptable for the Fed before the election, doing the same amid a potential slew of such prints probably will not be. The Fed of course makes its decisions independently (for now), even if the election of Chair is down to the President and the Senate, so in theory while Jay Powell is driving, the Fed will need to formally respond to any accelerating inflation or at least explain in detail why it thinks price rises might be temporary. Either way, things are going to get much more complicated now because of the politics. President Trump may well interfere more with the Fed in the coming months, and that would surely damage its credibility. If it was forced to deal once again with rising inflation, an independent Fed can at least clearly signal to the market what it is trying to achieve and will be listened to. However, a compromised and bullied Fed will be taken less seriously by markets, and much more economy-damaging action might need to be taken to achieve the same policy outcomes. The Fed now has more reasons than usual to hope for falling inflation in the coming months.