US Inflation Update: Fed’s Preferred Measure Remains Above Target, January Rate Cut Pause Under Review
The latest data from the US Department of Commerce reveals that inflation remains a concern, with the personal consumption expenditures (PCE) price index rising 2.8% year-on-year in November. This figure slightly exceeds October’s 2.7% and continues to surpass the Federal Reserve’s long-term inflation target of 2%. As a result, the Fed is expected to pause any further interest rate cuts during its upcoming meeting, as it evaluates the effects of previous rate adjustments and ongoing trade pressures.
Inflation Trends and Economic Indicators
The PCE price index, a key measure of inflation favored by the Federal Reserve, showed a monthly increase of 0.2% in both October and November. This persistent inflation rate indicates that the Fed’s efforts to stabilize prices may not yet be yielding the desired results. The core PCE inflation, which excludes volatile food and energy prices, also rose to 2.8% year-on-year in November, up from 2.7% in October. These figures suggest that the path toward disinflation is proving to be challenging for policymakers.
Despite the inflationary pressures, consumer spending has demonstrated resilience, increasing by 0.5% month-on-month in both October and November. However, economists have expressed caution, suggesting that this spending momentum may be built on weakening economic fundamentals. The data released is not the most current due to delays caused by the prolonged US government shutdown in late 2025, but it is expected to play a significant role in the Federal Reserve’s discussions next week.
Federal Reserve’s Policy Outlook
Following three consecutive interest rate cuts in 2025, which lowered the benchmark policy rate to a range of 3.50% to 3.75%, the Federal Reserve is anticipated to maintain these rates in January. Policymakers are likely to take a wait-and-see approach, focusing on the cumulative effects of previous rate reductions. The ongoing trade tensions, particularly those stemming from President Donald Trump’s tariff measures, are also influencing the Fed’s decision-making process as they assess the broader economic landscape.
The Fed faces the complex task of balancing inflation risks with labor market conditions while adjusting borrowing costs. The persistence of inflation above the target level complicates this balancing act, as the central bank seeks to foster economic stability without triggering further inflationary pressures.
Consumer Spending and Saving Trends
The report highlighted that the personal saving rate fell to 3.5% in November, down from 3.7% in October. This decline raises concerns, as analysts from Pantheon Macroeconomics described the current saving rate as “unsustainably low.” They noted that while consumer spending appears strong, it may be supported by increasingly fragile economic foundations. The analysts pointed to pressures on real after-tax incomes as a potential risk to sustained consumer spending.
Despite the seemingly robust consumer activity, economists Samuel Tombs and Oliver Allen warned that the expansion of spending might not be as solid as it appears. They indicated that the strength of consumer spending could be undermined by various economic pressures, including a slowdown in wage growth and limited momentum in new rents. As the Federal Reserve prepares for its upcoming meeting, these factors will likely weigh heavily on its policy considerations.
Future Economic Projections
Looking ahead, analysts predict that inflation may continue to fall short of the Federal Reserve’s projections over time. Factors contributing to this outlook include the relatively low level of tariff revenues and signs of slowing wage growth. As the Fed navigates these challenges, it must remain vigilant in monitoring both inflation trends and consumer behavior to ensure that economic growth remains on a stable trajectory.
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