WASHINGTON, Jan 26 (Reuters) - U.S. prices rose moderately in December, keeping the annual increase in inflation below 3% for a third straight month, which could allow the Federal Reserve to start cutting interest rates this year.
The personal consumption expenditures (PCE) price index increased 0.2% last month after an unrevised 0.1% drop in November, the Commerce Department's Bureau of Economic Analysis said on Friday. In the 12 months through December, the PCE price index increased 2.6%, matching November's unrevised gain.
Economists polled by Reuters had forecast the PCE price index climbing 0.2% on the month and rising 2.6% year-on-year.
Excluding the volatile food and energy components, the PCE price index gained 0.2% last month after rising 0.1% in November. The so-called core PCE price index increased 2.9% year-on-year, the smallest gain since March 2021, after rising 3.2% in November. The Fed tracks the PCE price measures for its 2% inflation target.
Monthly inflation readings of 0.2% over time are necessary to bring inflation back to target, economists say.
The government reported on Thursday that core PCE inflation increased at a 2.0% annualized rate in the fourth quarter after a similar rise in the
July-September quarter. Though financial markets have pushed the probabilities of a March rate cut to below 50% in a nod to the economy's continued resilience, a reduction in borrowing costs is still expected by June.
The U.S. central bank is expected to keep its policy rate unchanged at the current 5.25%-5.50% range at its meeting next week. Since March 2022, the Fed has raised its benchmark overnight rate by 525 basis points.
Easing inflation is boosting household purchasing power, helping to drive consumer spending and the overall economy.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, jumped 0.7% last month after rising 0.4% in November. When adjusted for inflation, overall consumer spending increased 0.5% in December after a similar rise in the prior month.
The solid increase in the so-called real consumer spending puts consumption on a higher growth trajectory heading into the first quarter.
The data was included in the fourth quarter's advance gross domestic product report published on Thursday. Consumer spending increased at a strong 2.8% rate last quarter, accounting for the bulk of the economy's 3.3% growth pace.
Reporting by Lucia Mutikani; Editing by Chizu Nomiyama
