Inflation Reignites: Fed’s Favorite Inflation Gauge Shows Prices Rising Again

The Fed uses the PCE price index for its target of two percent inflation. The inflation rate has been running above the Fed’s target, indicating prices are rising faster than the Fed thinks is appropriate for a healthy economy, ever since March 2021.

At their December meeting, Fed officials forecast that year-over-year inflation would fall to 2.4 percent by the end of this year and core inflation would decline to 2.4 percent as well. The projections of Fed officials do not show prices returning to target until 2026.

A decline in inflation means a slowdown in the rise of prices rather than a reversal of past price increases. Fed officials refer to a decline in inflation as “disinflation.” An outright reversal of prices is rare and usually is not sustained outside of a serious economic downturn.

Inflation has come down significantly since the PCE price index peaked at 7.1 percent in June of 2022 and progress on bringing inflation down has been much slower than Fed officials initially expected. Inflation declined from January through June in every month except April. But from June through September, progress stalled. After falling in October, year-over-year inflation has declined every month.

Looked at on a month-to-month basis, progress over the past year has been bumpy. Inflation increased from the prior month in as many months as it fell. Still, the overall trajectory has brought inflation down from the 0.6 percent monthly increased in January of 2023 to December’s 0.2 percent.

If the economy were to experience the rate of inflation seen in December in each month for the year to come, inflation would run about 2.1 percent, slightly above the Fed’s target. Some economists prefer to look at an annualized version of inflation over the past three months, which came in at 1.5 percent in December. Six-month annualized inflation comes out to 1.9 percent.