US inflation decelerating in boost to economy

For the first time in more than 3.5 years, US prices fell in November, pushing the annual increase in inflation further below 3 per cent, and boosting financial market expectations of an interest rate cut from the Federal Reserve next March.

The report from the Commerce Department on Friday also showed underlying inflation pressures continuing to subside. Cooling inflation left more income at the disposal of households, helping to underpin consumer spending and the overall economy as the year winds down.

This was yet another data set showcasing the durability of the economic expansion, thanks to a resilient labour market. The economy has defied dire predictions of recession from economists and some business executives going back to late 2022.

"(Fed) Chair (Jerome) Powell couldn't have asked for a better present this year," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "So far at least, the endgame is turning out better than the Fed or nearly anyone could have imagined at the start of the year. While the Fed won't rush into cutting rates, it's likely now just a matter of time."

Inflation, as measured by the personal consumption expenditures (PCE) price index, fell 0.1 per cent last month, the Commerce Department's Bureau of Economic Analysis said. That was the first monthly decline in the PCE price index since April 2020 and followed an unchanged reading in October.

Food prices edged down 0.1 per cent and energy prices dropped 2.7 per cent. In the 12 months through November, the PCE price index increased 2.6 per cent after rising 2.9 per cent in October. October marked the first time since March 2021 that the annual PCE price index was below 3 per cent.

Economists polled by Reuters had forecast the PCE price index unchanged on the month and rising 2.8 per cent year-on-year.

Excluding the volatile food and energy components, the PCE price index rose 0.1 per cent in November, matching October's gain.

The so-called core PCE price index advanced 3.2 per cent year-on-year, the smallest rise since April 2021, after increasing 3.4 per cent in October. The Fed tracks the PCE price measures for its 2 per cent inflation target.

The government reported on Thursday that core PCE inflation increased at a 2.0 per cent annualized rate in the third quarter. That, combined with November's mild gain, put the six-month core PCE inflation rate at 1.9 per cent.

Monthly inflation readings of 0.2 per cent on a sustainable basis are needed to bring inflation back to the Fed's target, economists say. Financial markets saw a roughly 75 per cent chance of a rate cut at the Fed's March 19-20 policy meeting, according to CME Group's FedWatch Tool.

Subsiding inflation is brightening the mood for many Americans, with a separate report from the University of Michigan on Friday showing consumer sentiment soaring in December, reversing all declines from the previous four months.

President Joe Biden, whose popularity has been hurt by unhappiness over the high cost of living, welcomed the news.

"This reflects the hard work we did together to fix our supply chains and the surge of Americans into the workforce. It's remarkable progress," Biden said in a statement.

Stocks on Wall Street were trading higher. The dollar fell against basket of currencies. US Treasury prices rose.

(With Reuters inputs.)