December PCE Data: What the US Inflation Rate Means for Investors

Markets are fully focused on this coming Friday, January 31. On this day, the Bureau of Economic Analysis (BEA) will release the December 2024 PCE data before the stock market opens—a data point that will be crucial for the future monetary policy of the US Federal Reserve.

Why PCE Data Is So Critical for Investors

Markets are closely watching the Fed, but many investors are focusing on the wrong inflation index. While the Consumer Price Index (CPI) dominates media coverage, the Fed itself uses a different measure: the Personal Consumption Expenditures Index, or PCE. This is published regularly at the end of the following month and provides the US central bank with a more accurate picture of actual price developments.

The December data come at a critical time. The Federal Open Market Committee (FOMC) will meet on January 28 and 29 to decide on interest rates. The PCE figures two days later will provide important clues for setting the course at the next FOMC meeting in March.

PCE versus CPI: Why the Fed Is Taking a Different Approach

The difference between the PCE index and the CPI is fundamental. The PCE captures the spending patterns of all American households—urban and rural—as well as expenditures made by employers or the government on behalf of consumers. The CPI, on the other hand, only considers urban households and is based on a fixed basket of goods.

Even more importantly: the PCE is reweighted monthly, whereas the CPI does this only annually. This makes the PCE more dynamic and responsive to shifts in consumer behavior. Another advantage of the PCE is its scope. The index includes medical care paid for by third parties—a major component of the US economy that the CPI underrepresents.

About two-thirds of all domestic expenditures are reflected in the PCE, giving it high relevance for overall price development. The core PCE, which excludes food and energy, provides the Fed with a clearer picture of structural inflation, detached from short-term fluctuations in commodity prices.

Recent Signals Indicate a Cautious Outlook

The good news for those hoping for rate cuts: recent PCE releases send reassuring signals. In November, core PCE rose by only 0.1 percent month-over-month—a significant slowdown after months of stagnation. Prices for core services increased by 0.2 percent, marking the slowest rise since August. Notably, prices for core goods excluding energy fell for the first time in three months.

This development initially calmed markets. US Treasury yields declined, and the US dollar weakened. Many market participants interpreted this as a signal for possible further Fed rate cuts in 2025.

However, the euphoria was short-lived. The December employment report, released in early January, surprised with much stronger-than-expected figures. This raised questions about the actual pace of inflation decline.

What Economic Data Are Indicating Now

Recent economic indicators for January point again to more moderate price developments. On January 14, it was shown that wholesale inflation unexpectedly declined. The Producer Price Index (PPI) for final demand rose by 0.2 percent month-over-month—well below economists’ expectations of 0.4 percent.

A day later, the December CPI was higher than forecast, but the key core CPI increased by 0.2 percent monthly, significantly weaker than in previous months.

Given this dynamic, expectations for upcoming PCE data are moderate. The market is pricing in modest gains. Such a result could trigger rally impulses, especially if the data fall short of forecasts.

The Scenario with Hotter Data

The opposite scenario carries significant risks. If the PCE data come in substantially higher and signal that price pressures are of a structural nature and not just temporary, the market could come under selling pressure. Pessimistic expectations regarding Fed rate hikes could quickly trigger a sell-off.

The key point: the Fed is “data-dependent.” No single data point determines monetary policy. Rather, it is the overall picture from multiple indicators that could reveal a trend—something several Fed members have already emphasized.

Investment Advice for Investors

Investors should not view the US PCE data on January 31 in isolation but within the broader economic context. At the same time, flexibility is advisable. The release before the stock market opens can lead to significant market movements. Portfolio positions should be reviewed and adjusted if necessary to prepare for various scenarios. In a data-dependent environment like this, adaptability remains the key to success.