Key US inflation measure posts largest monthly gain since April

US inflation increased by the most in eight months in December amid a surge in consumer spending, suggesting the Federal Reserve would probably be in no hurry to resume cutting interest rates soon. Other data on Friday showed labour costs rose in the fourth quarter as wages edged up. Price pressures picked up in the fourth quarter, stalling the progress in lowering inflation.

The US central bank kept rates unchanged on Wednesday for the first time since launching its policy easing cycle in September. The policy statement accompanying the decision did not include the reference to inflation having “made progress” toward the Fed’s 2% target.

“The Fed’s prognosis is for a slower pace of monetary easing moving forward, as the economy is doing well and prices are only slowly returning to target in an environment of great uncertainty,” said Carl Weinberg, chief economist at High Frequency Economics. “These data support that strategy.” The Personal Consumption Expenditures (PCE) Price Index rose 0.3% last month, the largest increase since last April, after an unrevised 0.1% gain in November, the Commerce Department’s Bureau of Economic Analysis said.

The increase was in line with economists’ expectations. In the 12 months through December, the PCE price index advanced 2.6%. That was the biggest gain in seven months and followed a 2.4% rise in November. The data was included in the advance gross domestic product report for the fourth quarter published on Thursday. The Fed tracks the PCE price measures for monetary policy. It has reduced its benchmark overnight interest rate by 100 basis point to the 4.25%-4.50% range since September. The central bank has forecast only two rate cuts this year, down from the four it had projected in September. That reflected uncertainty about the economic impact of President Donald Trump’s plans for tax cuts, broad tariffs on imports and an immigration crackdown, which economists view as inflationary.

No rate cut is expected before June. Excluding the volatile food and energy components, the PCE price index rose 0.2% last month after an unrevised 0.1% increase in November. In the 12 months through December, the so-called core inflation advanced 2.8%, matching the increase in November.

US stocks opened higher. The dollar rose against a basket of currencies. US Treasury prices were flat.

ROBUST CONSUMER SPENDING Fears about tariffs have sent consumers rushing to stock up on goods to avoid higher prices, helping to power consumer spending, which notched its fastest growth pace in nearly two years in the fourth quarter, sustaining the economic expansion.

Consumer spending, which accounts for more than two-thirds of US economic activity, jumped 0.7% in December after an upwardly revised 0.6% rise in November. Spending was previously reported to have gained 0.4% in November.

The rise in spending last month occurred across goods and services. Economists expect pre-emptive buying continued in January. The economy grew at a 2.3% annualized rate in the fourth quarter, as the surge in consumer spending offset drags from inventories almost being depleted and a strike at Boeing in the autumn that weighed on business spending on equipment.

Strong consumer spending last month sets the economy on a higher growth trajectory heading into the first quarter.

A separate report from the labour Department’s Bureau of labour Statistics showed the employment cost index (ECI), the broadest measure of labour costs, gained 0.9% in the fourth quarter after rising 0.8% in the third quarter.

Economists had forecast the ECI would climb 0.9%. labour costs increased 3.8% in the 12 months through December after rising 3.9% in the year through September.

The ECI is viewed by policymakers as one of the better measures of labour market slack and a predictor of core inflation because it adjusts for composition and job-quality changes.

Wages and salaries, which account for the bulk of labour costs, rose 0.9% last quarter after gaining 0.8% in the July-September quarter. They increased 3.8% on an annual basis, slowing from the third quarter’s 3.9% rise.

When adjusted for inflation, overall wages increased 0.9% in the 12 months through December after advancing 1.4% in the July-September quarter. The rising so-called real income is underpinning spending.

Private sector wages and salaries rose 0.9%. They increased 3.7% in the 12 months through December after rising 3.8% in the third quarter. State and local government wages gained 1.0% last quarter, matching the gain in the July-September quarter. They rose 4.5% in the 12 months through December. A separate report from the labour Department’s Bureau of labour Statistics showed the employment cost index (ECI), the broadest measure of labour costs, gained 0.9% in the fourth quarter after rising 0.8% in the third quarter.

Reuters