Fed’s Preferred Measure of Inflation Eases Ahead of Policy Meeting

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What's Happening Today

Ahead of the Federal Reserve's big two-day policy meeting next week, a key index of consumer prices released today showed inflation continuing to ease.

The Commerce Department's Personal Consumption Expenditures (PCE) Price Index rose 0.1% last month and was up 5% from a year ago, slowing from 5.5% in November. Excluding more volatile food and energy prices, the "core" rate edged 0.3% higher in December and was 4.4% higher than the year before, decelerating from November's 4.7%. Both the rise in the overall index and core rate were roughly in line with economist estimates.

The PCE Price Index is the Federal Reserve's preferred gauge of inflation because it tracks consumer decisions more accurately than the Consumer Price Index (CPI). That's because the "basket of goods" that is tracked in the PCE Price Index is updated more frequently than for CPI, which uses a fixed basket of goods and services.

Next week, the Fed will kick off its first policy meeting for 2023 and these figures could push the central bank to make more moderate decisions in its inflation-fighting measures. Fed funds futures data tracked by CME Group shows that traders overwhelmingly expect the Fed to raise interest rates by 25 basis points.

Stocks are on the rise after the inflation report, as investors grow more optimistic about inflation easing and potentially more moderate action by the Fed.

- Kara

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What's Happening Today

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Term of the Day

Core Inflation

The core inflation rate is the price change of goods and services minus food and energy. The prices of food and energy products are volatile; they change so quickly that including these categories can skew an accurate reading of the true severity of inflation.

This exclusion can make the core inflation rate more accurate than the headline inflation rate in measuring underlying inflation trends. This accuracy is why central banks prefer using the core inflation rate when setting monetary policy.

Off the Charts

Where do residents pay the most in state income taxes? As of 2022, California and Hawaii rank the highest in state income taxes, where filers at higher income levels can be taxed up to 13.3% and 11%, respectively. Meanwhile, North Dakota and Pennsylvania have the lowest state income tax rates, and seven states—Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, and Wyoming—do not impose any tax on residents' incomes.