Inflation finally dips below 3 percent as U.S. economy nears ‘soft landing’

A key annual inflation metric fell below 3 percent in November, the latest sign that the U.S. is coming in for a rare soft landing from high price growth without a recession.

The personal consumption expenditures (PCE) price index dropped to 2.6 percent year-over-year in November, according to data released Friday by the Bureau of Economic Analysis.

The October PCE price index was also revised down to a 2.9 percent annual gain.

The Federal Reserve uses the PCE price index as its main measure of inflation. The bank aims for 2 percent annual inflation when adjusting interest rates.

Excluding more volatile food and energy prices, however, so-called “core” PCE dropped to 3.2 percent annually in November from 3.4 percent in October.

“Within services, the largest contributors to the increase were housing and utilities (led by housing) and food services and accommodations (led by purchased meals and beverages). Within goods, the leading contributor to the decrease was gasoline and other energy goods (led by motor vehicle fuels, lubricants, and fluids),” the Bureau of Economic analysis wrote as part of its latest analysis.

Falling gas prices in particular will be welcome news to consumers, who are growing more confident in the economy after years of high prices. The latest consumer confidence survey from the nonprofit research group The Conference Group was released Wednesday and hit a five-month high in December, with jumps in confidence across all ages and income levels.

“December’s increase in consumer confidence reflected more positive ratings of current business conditions and job availability, as well as less pessimistic views of business, labor market, and personal income prospects over the next six months,” said Dana Peterson, chief economist at The Conference Board.

The inflation report has some thinking the Fed could start cutting interest rates sooner than expected.

“We entered 2023 worried about inflation and how many more times the Fed was going to raise rates, but we are ending 2023 surprised at how low inflation has come down – especially as unemployment has remained so low – and are wondering how many times the Fed will cut,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a statement.

The Fed held interest rates steady at its final monetary policy meeting of the year earlier this month, but signaled its aggressive spate of interest rate hikes may be over.

The central bank hiked interest rates to 22-year highs over the past two years, from near zero percent to a range of 5.25 to 5.5 percent. All but three members of the Fed’s rate-setting panel forecasted at least two rate cuts in 2024, as prices have come down.

The latest PCE price index bolsters hopes that high rates will come down next year.

“Overall, this was a very good report for the economy as PCE remained high and prices continued to disinflate,” Raymond James chief economist Eugenio Aleman said in a statement.

Updated at 9:55 a.m. ET