US inflation cools, opening door to potential Fed rate cut in March

US prices experienced a decline in November for the first time in over 3-1/2 years, bringing the annual inflation rate further below the 3 per cent threshold. The latest report from the Commerce Department, released on Friday, has fueled speculation in financial markets about the possibility of an interest rate cut by the Federal Reserve in March.

According to the Commerce Department's Bureau of Economic Analysis, the Personal Consumption Expenditures (PCE) price index, a key measure of inflation, dipped by 0.1 per cent last month. This marked the first monthly decrease since April 2020, following an unchanged reading in October. The drop in food prices by 0.1 per cent and a significant 2.7 per cent decline in energy prices contributed to the overall decrease.

Over the 12 months leading to November, the PCE price index registered a 2.6 per cent increase, down from October's 2.9 per cent. This is the first time since March 2021 that the annual PCE price index has fallen below 3 per cent, indicating a notable easing of inflationary pressures.

Economists, who had anticipated an unchanged PCE price index every month and a 2.8 per cent year-on-year increase, were taken by surprise.

Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, commented, "(Fed) Chair (Jerome) Powell couldn't have asked for a better present this year. So far at least, the endgame is turning out better than the Fed or nearly anyone could have imagined at the start of the year. While the Fed won't rush into cutting rates, it's likely now just a matter of time."

In November, excluding the volatile food and energy components, the core PCE price index increased by 0.1 per cent, matching the gain seen in October. The year-on-year increase for the core PCE price index was 3.2 per cent, the smallest rise since April 2021, after a 3.4 per cent increase in October.

To meet the Federal Reserve's 2 per cent inflation target, economists suggest that sustained monthly inflation readings of 0.2 per cent are needed. As of Friday, financial markets were pricing in a roughly 72 per cent chance of a rate cut at the Fed's policy meeting scheduled for March 19-20, according to CME Group's FedWatch Tool.

The US central bank, which held rates steady last week, indicated in its new economic projections that the historic monetary policy tightening witnessed over the past two years has concluded, and lower borrowing costs are anticipated in 2024. Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25 per cent-5.50 per cent range.

Consumer spending, a crucial driver of the US economy, increased by 0.2 per cent in November. Adjusted for inflation, real consumer spending rose by 0.3 per cent, adding to positive economic signals this week. Earlier data on single-family housing starts and building permits hitting 1-1/2-year highs in November had prompted economists to revise upwards their GDP growth estimates for the current quarter. Projections now reach as high as a 2.7 per cent annualized rate, following the 4.9 per cent pace of growth in the third quarter.

(With Reuters inputs.)