Fed's Preferred Inflation Measure Continues To Fall: What You Need To Know

The SPDR S&P 500 ETF Trust SPY SPY traded slightly lower on Friday morning after the Bureau of Economic Analysis 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 5.5% in November and a 2022 high of 7% in June.

The December PCE reading came in below economist estimates of 5.5%.

Core PCE, which excludes volatile food and energy prices and is the preferred inflation measure for the Federal Reserve, was up 4.4% in December, in-line with economist estimates and below its 2022 high of 5.2% in September.

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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 yield on 10-Year U.S. Treasury bonds was up 0.06% on Friday morning to 3.55% but is down from a peak of more than 4.2% back in November.

The S&P 500 is off to a strong start to 2022 on investor optimism the Fed may be able to pivot from rate hikes to rate cuts sooner than expected.

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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.

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