Key Inflation Measure Shows Core Inflation at 2.8%, Meeting Expectations

Fed Governor Michelle Bowman predicts inflation will slow through 2025.

WASHINGTON, D.C. — Inflation ended 2024 on a strong note, with a key price measure closely watched by the Federal Reserve showing inflation remained above the central bank’s target, according to data released Friday by the Commerce Department.

The personal consumption expenditures (PCE) price index rose 2.6% year-over-year in December, marking a 0.2 percentage point increase from November and in line with economists' forecasts. Core PCE, which excludes volatile food and energy prices, posted a 2.8% increase, also matching expectations and remaining unchanged from the previous month. The Fed generally favors core PCE as a more accurate measure of long-term inflation trends.

On a monthly basis, headline PCE increased 0.3%, while core PCE rose by 0.2%, both figures meeting analysts' predictions.

The Federal Reserve’s inflation target is 2%, a level the PCE index has not reached since February 2021. Food prices rose just 0.2% in December, but energy costs surged 2.7%. Meanwhile, prices for durable goods, which include items such as electronics and appliances, saw a 0.4% decline. Nondurables, such as clothing and personal care products, saw a 0.5% increase.

The inflation data was released two days after the Federal Reserve held its key interest rate steady between 4.25% and 4.5%, pausing after three consecutive rate cuts totaling one percentage point.

Despite the rise in inflation, Clark Bellin, chief investment officer at Bellwether Wealth, noted that the central bank's decision to cut interest rates in December, while inflation remained above its target, seemed somewhat contradictory. “Inflation is still firmly above the Federal Reserve’s 2% target,” Bellin said, “and while the PCE reading was in-line with expectations, it shows that inflation ended the year at elevated levels.”

In remarks made Friday morning, Federal Reserve Governor Michelle Bowman expressed her expectation that inflation will slow in 2025 but emphasized the need for the central bank to remain cautious. "There is still more work to be done to bring inflation closer to our 2% goal,” Bowman stated in a speech to business leaders in Portsmouth, New Hampshire. “I do expect inflation will begin to decline again, and by the end of the year, it will be lower than where it stands now."

The report also indicated that personal income increased by 0.4% in December, in line with predictions, while consumer spending rose 0.7%, surpassing the expected 0.6% increase.

Additionally, the Bureau of Labor Statistics reported a 0.9% increase in the employment cost index (ECI) for the fourth quarter of 2024, slightly ahead of expectations and the previous quarter’s reading. On an annual basis, the ECI increased by 3.8%, a slight decrease from the 3.9% rise recorded in the third quarter.

While inflation remains above target, the Fed’s cautious approach to monetary policy is expected to continue as it seeks signs of sustained price stability moving into 2025.