Fed's preferred inflation gauge shows price pressures eased last month

WASHINGTON (AP) - An inflation gauge that is closely watched by the Federal Reserve barely rose last month in a sign that price pressures cooled after two months of sharp gains.

Friday's report from the Commerce Department showed that prices rose just 0.1% from October to November. Excluding the volatile food and energy categories, prices also ticked up just 0.1%, after two months of outsize 0.3% gains.

The milder inflation figures arrive two days after Federal Reserve officials, led by Chair Jerome Powell, rocked financial markets by revealing that they now expect to cut their key interest rate just two times in 2025, down from four in their previous estimate. Stickier inflation, Powell said, "might be the single biggest factor" causing the central bank to reduce the number of rate cuts it envisions. Fewer Fed rate cuts would likely mean that mortgage rates and other consumer borrowing costs would remain elevated.

Friday's data did contain one sign of still-persistent inflation: Year-over-year inflation edged up to 2.4% in November from 2.3% in October and above the Fed's 2% inflation target. But yearover-year "core" prices, which exclude volatile food and energy costs, were unchanged at 2.8%. The Fed pays closer attention to the core figures, which are regarded as a better sign of where inflation is likely headed.

The modest monthly inflation figures in Friday's report point to one likely reason why the Fed was willing to cut its benchmark interest rate Wednesday: Its preferred inflation gauge, known as the personal consumption expenditures price index, is coming in lower - and closer to the Fed's target - than the higher-profile consumer price index. The core CPI, for example, was 3.3% in November.

Friday's report also showed that consumers increased their spending by a solid 0.4% from October to November, a sign that households continue to propel the economy. On Thursday, the government reported that the U.S. economy grew at a healthy 3.1% annual rate last quarter, largely thanks to consumer demand.

"We can break for the holidays with the comfort that the economy's growth engine is humming along," Oren Klachkin, an economist at Nationwide Financial, wrote in a client note. "The Fed would like to continue lowering interest rates, but it feels it can't do so amid what increasingly looks like an elevated inflation and resilient growth environment."

Incomes also rose 0.3% last month, faster than prices - a trend which, if it continues over time, should help Americans adjust to higher costs.

Powell had said Wednesday that even if Friday's inflation figures came in unusually low, it would have only a limited effect on the Fed's outlook.

"Our position shouldn't change based on two or three points of good or bad data," he said at a news conference. "We have a long string now of inflation coming down gradually over time. ... We still have some work to do."

Inflation, according to the measure released Friday - the personal consumption expenditures price index - has plummeted from a peak of 7.2% in June 2022 to 2.1% in September. The Fed's tool for fighting inflation is to steadily raise borrowing costs across the economy, which tends to cool spending and growth.

On Wednesday, policymakers revised their expectation for inflation by the end of 2025 to 2.5%, slightly above its current rate. The officials still expect core prices to fall slightly by the end of next year, also to 2.5%.

"It's way below where it was but we really want to see (more) progress on inflation," Powell said at a news conference Wednesday. "As we think about further cuts, we're going to be looking for progress."

The Fed did cut its benchmark rate Wednesday by a quarter point to about 4.3%, after its larger-than-usual halfpoint rate cut in September and a quarter-point reduction in November.

The Fed tends to favor the PCE index over the better-known consumer price index. The PCE index tries to account for changes in how people shop when inflation jumps. It can capture, for example, when consumers switch from pricier national brands to cheaper store brands.

In general, the PCE index tends to show a lower inflation rate than CPI. In part, that's because rents, which have been high, carry double the weight in the CPI.