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Prices in the United States fell in November for the first time in more than three and a half years, sending inflation below 3% on an annual basis, strengthening financial markets’ hopes of a rate cut by the American federal government Reserve from March.
Data released by the US Commerce Department on Friday also showed that underlying inflation pressures continued to ease last month. This slowdown has allowed households to increase their purchasing power, benefiting consumer spending and the economy as a whole as the year ends.
“Fed Chairman Jerome Powell couldn’t have asked for a better gift this year,” said Sal Guatieri, an economist at BMO Capital Markets in Toronto.
“At least for now, things are looking better than the Fed or almost anyone could have imagined at the beginning of the year. While the Fed will not rush to cut rates, it is likely only a matter of time,” he added.
Inflation, as measured by the personal consumption expenditures (PCE) price index, the Fed’s preferred indicator, fell 0.1% last month, the Commerce Department said. This is the first monthly decline in the PCE price index since April 2020 and follows stagnation (0.0%) in October.
Food prices fell slightly by 0.1% and energy prices fell by 2.7%.
In the 12 months to November, the PCE price index rose 2.6%, after rising 2.9% in October. This month was the first since March 2021 in which the annual PCE price index was below 3%.
Excluding volatile items such as food and energy, the PCE price index rose 0.1% in November, the same as in October.
On an annual basis, the core PCE price index rose 3.2% in November, the smallest increase since April 2021, after a 3.4% increase in October.
EXPECTED PRICE REDUCTION OF 125 POINTS IN 2024
The Fed has an inflation target of 2%.
Financial markets expect an 82.5 percent chance of a Fed rate cut of at least 25 basis points in March, according to CME Group’s FedWatch Barometer. They forecast that borrowing costs will be reduced by 125 basis points by September 2024.
The 10-year U.S. Treasury yield fell about a basis point to 3.8894% on Friday, compared with a peak of more than 5% reached in October.
On the foreign exchange side, the dollar lost 0.31% against a basket of benchmark currencies.
On the stock market, the Dow Jones was up 0.29%, the Standard & Poor’s 500 was up 0.49% and the Nasdaq was up 0.48% at around 3:30 p.m. GMT.
The Fed last week, as expected, decided to keep its interest rate target at 5.25% to 5.50% for the third straight day, while its chairman, Jerome Powell, suggested that the central bank’s policy director was close to doing so, if not already reached its peak.
Since March 2022, it has raised its key interest rates by 525 basis points.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.2% last month. October data was revised to show a 0.1% increase in spending, instead of the 0.2% previously reported. Economists forecast a 0.3% increase in spending.
Adjusted for inflation, consumer spending rose by 0.3%. This statistic adds to this week’s data that suggests the economy is regaining some strength.
This round of optimistic data has prompted economists to revise upward their estimates for gross domestic product (GDP) growth for the current quarter, estimating that it could reach an annual rate of 2.7%. The US economy grew at a rate of 4.9% in the third quarter.
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