Forecasts for December PCE Report Show Continued Improvement on Core Inflation

Key Takeaways

• Friday’s PCE report is expected to show a relatively hot headline number, alongside improvement on the core measure of inflation, which excludes volatile food and energy prices.
• Economists expect PCE inflation to keep falling toward the Federal Reserve’s 2% target over the next few months.
• The Fed is expected to hold interest rates steady until midyear.

Forecasts for the December Personal Consumption Expenditures Price Index report find core inflation continuing to moderate, even as elevated gas prices put upward pressure on the headline number.

Friday’s PCE data will come ahead of an inflection point for markets and the economy, with the Federal Reserve widely expected to hold interest rates steady for the next few months. While price pressures have steadily moderated from their peak two years ago, investors are now contending with a slew of unanswered questions about the impact of new policies under President Donald Trump and the possibility that the central bank might keep interest rates higher for longer than initially expected.

In December, economists believe the overall PCE index rose 0.3% on a monthly basis and 2.6% on an annual basis, according to FactSet’s consensus estimates. They anticipate that the core measure of PCE inflation, which excludes volatile food and energy prices, rose 0.2% on a monthly basis and 2.8% over the past year.

Despite the likelihood of an uptick in the monthly headline reading for December, Ameriprise Financial chief economist Russell Price says that “we are continuing to make progress” on inflation. He expects 0.3% headline PCE growth and 0.2% core PCE growth for the month, in line with the consensus estimate. “We still expect both rates to make further progress in the months ahead and probably get close to—but not quite at—the Fed’s target of about 2% by midyear,” he says.

December PCE Report Highlights

• PCE report release date and time: Friday, Jan. 31, at 8:30 a.m. EDT
• The PCE Price Index is forecast to rise 0.30% in December after rising 0.13% in November.
• Core PCE is forecast to rise 0.2% in December after rising 0.11% in November.
• Year over year, the PCE Price Index is forecast to rise 2.6% in December after increasing 2.4% in November.
• Core PCE year over year is forecast to rise 2.8% in December after increasing the same amount in November.

Much of the source data for the PCE index is released ahead of the report in other data sets like the Consumer Price Index report. That means that economists already have a good idea of what Friday’s PCE data will look like.

The December CPI report showed that core inflation continued to moderate in key areas like goods, even as the headline inflation rate ticked up slightly thanks to rising energy prices. Markets celebrated after that report, which eased investors’ worries about reaccelerating price pressures.

Price doesn’t expect another reaction like that on Friday, though the data will likely show the same story. “It’s already been on display that the numbers are moderating, and PCE should show a similar message,” he says.

Economists generally expect core PCE inflation to continue falling in the months ahead, though sticky services prices still exert upward pressure on the index. Morningstar senior US economist Preston Caldwell is looking for the core PCE inflation rate to drop as low as 2.2% by March, provided we don’t see another spike in inflation, as we did in the first quarter of 2024.

When Will the Fed Cut Rates?

The Fed held rates steady at its first meeting of the year on Wednesday afternoon, in a move that was no surprise to markets. In a statement, the central bank’s policy-setting committee noted that “inflation remains somewhat elevated.” With the economy still growing and the labor market showing no signs of cracking, central bankers have room to wait for more evidence of cooling price pressures before making another move to cut rates.

“It’s a very rational and reasonable view to remain on pause,” Price says, citing strong consumers, healthy labor market data, and robust economic growth. He expects to see the next quarter-point rate cut at the June meeting.

Some strategists have even suggested that after cutting rates by a full percentage point last fall, the Fed will not cut rates again at all this cycle. “The labor market is stabilizing around full employment and inflation is stuck modestly above target,” economists from Bank of America wrote in a note to clients earlier this month.