'Mild Recession' Imminent? Experts React To 4.4% Core PCE Inflation Ahead Of Next Week's Key Fed Decision

The SPDR S&P 500 ETF Trust SPY SPY traded lower by 0.3% on Friday morning after the Bureau of Economic Analysis (BEA) reported a 5% increase in the personal consumption expenditures (PCE) price index in the month of December, the latest signal that inflation is trending steadily lower.

What Happened: The headline PCE rose 5% in December. That's down from 8.5% in November and a 2022 high of 7% in June. The December PCE reading came in well below economist estimates of 5.5%.

Core PCE inflation, which excludes volatile food and energy prices, was up 4.4% in December, in-line with economist estimates.

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The BEA said spending for personal consumption declined by 0.2% in December compared to November, a potentially troubling sign for the economy.

Earlier this month, the Labor Department reported the Consumer Price Index (CPI) was up 6.5% in December, down from a 2022 peak of 9.1% in June. The Labor Department also reported that U.S. wages grew 4.6% year-over-year in December.

The latest PCE inflation reading comes ahead of the Federal Reserve's next meeting that concludes on Feb. 1. The bond market is pricing in a 98.1% chance the Fed will raise interest rates by another 0.25% next week, bringing its fed funds target range to between 4.5% and 4.75%.

The Fed has been raising interest rates since early 2022 in an attempt to bring down inflation. Rising interest rates weigh on the valuations of risk assets like stocks and bonds, but falling bond prices have pushed bond yields higher.

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Voices From The Street: Jeffrey Roach, Chief Economist for LPL Financial, says the Fed has the green light to downgrade to a 0.25% rate hike next week.

"Faltering growth and decelerating inflation will likely cause the Fed to refocus on growth, the other part of its dual mandate," Roach said.

Bill Adams, Chief Economist for Comerica Bank, said another sharp drop in PCE is further evidence the U.S. may have already slipped into a recession in late 2022.

"Comerica forecasts for the Fed to make that quarter percentage point hike next week and then another in March, and then go on hold as the economy enters a mild recession," Adams said.

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