The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.1% in December, while the year-over-year reading declined from 5.5% to 5%. Core PCE, which strips out volatile food and energy prices, rose by 0.3% with the year-over-year change falling from 4.7% to 4.4%. 

What’s the bottom line? Headline PCE has declined nearly 2% after peaking last June, while Core PCE is down 1% after reaching 5.4% last February. This is a meaningful improvement in inflation, and the decline is expected to continue. Inflation is calculated on a rolling 12-month basis, so the total of the past 12 monthly inflation readings gives us the year-over-year rate of inflation. Readings from the start of last year are higher comparisons, so if we continue to see lower monthly inflation readings, the annual rate of inflation will continue to move lower.