The central bank's preferred measure of inflation is below 3% for the first time since March 2021

The central bank's preferred inflation benchmark has moved below 3% For the first time since March 2021, before the start of the central bank's rate hike campaign.

The Personal Consumption Expenditure (PCE) index grew 2.6% year-on-year in December, in line with last month's print. “Core” PCE, which excludes volatile food and energy items, grew 2.9%, down from 3.2% from the previous month and below the 3.0% economists polled by Bloomberg expected.

Core PCE is an inflation measure frequently cited by Federal Reserve Chairman Jerome Powell.

On a monthly basis, core PCE rose 0.2% in December, compared with 0.1% in November. Importantly, annualized core PCE has now been below the central bank's 2% target over the past three and six months.

“Core PCE inflation has been running at an annualized pace with the Fed's 2% target for seven months now,” U.S. economist Andrew Hunter, vice president at Capital Economics, said in a note to clients. “This reiterates the message that nothing has really reached the 'last mile' of inflation, and while real economic growth remains resilient, there is plenty of room for the Fed to start cutting interest rates soon.”

The inflation data could fuel expectations that the central bank will soon start cutting interest rates after two years of highs. During the December Fed press conference, Powell YAhoo Finance Jennifer Schoenberger The central bank wants to “loosen control over the economy” before inflation reaches 2%.

“Ultimately, the driver of rate cuts in my view is what happens to inflation,” Goldman Sachs chief economist John Hatzius said on Yahoo Finance Live on Jan. 17. “And inflation tends to reduce the monthly ups and downs, and it's still high. Just like that.”

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Entering the silver lining, markets are now pricing in a 50-50 chance of a rate cut in March, according to the CME FedWatch tool. The Federal Reserve's next decision on interest rates will be released on Wednesday, January 31.

December's PCE reading was in line with the month's Consumer Price Index, another closely watched inflation measure, which also showed a cooling core price increase. December's CPI report showed core inflation at 3.9%.

Importantly, both prints coincided with recent positive readings in the economy. On Thursday, fourth-quarter economic growth was stronger than expected. A day earlier, data from the S&P Flash PMI showed that economic output in January hit a seven-month high. This comes as consumer spending is resilient and the labor market is tactical.

Josh Shafer is a Yahoo Finance reporter. Follow him on X @_joshschafer.

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