Fed's favorite inflation gauge rose 0.2% in December and was up 2.9% from a year ago

An important inflation gauge released Friday showed that the rate of price increases cooled as 2023 came to a close.

The Commerce Department's personal consumption expenditures price index for December, an important gauge for the Federal Reserve, increased 0.2% on the month and was up 2.9% on a yearly basis, excluding food and energy. Economists surveyed by Dow Jones had been looking for respective increases of 0.2% and 3%.

On a monthly basis, core inflation increased from 0.1% in November. However, the annual rate declined from 3.2%. The 12-month rate is the lowest since March 2021.

Including volatile food and energy costs, headline inflation also rose 0.2% for the month and held steady at 2.6% annually.

The release adds to evidence that inflation, while still elevated, is continuing to make progress lower, possibly giving the Fed a green light to start cutting interest rates later this year. The central bank targets 2% as a healthy annual inflation rate.

Markets took little notice of the data, with stock futures indicating only a slight change at the open and Treasury yields mostly lower.

"Inflation dynamics inside the metric that the Fed uses to formulate policy strongly imply that the central bank will hit its inflation target in the near term," said Joseph Brusuelas, chief economist at RSM. "This will create the conditions in which it makes [its] policy pivot and begins a multiyear campaign in which it reduces the policy rate towards a range between 2.5% and 3%."

The Fed's benchmark overnight interest rate is currently targeted between 5.25%-5.5%.

As inflation drifted closer to the Fed's target, consumer spending increased 0.7%, stronger than the 0.5% estimate. Personal income growth edged lower to 0.3%, in line with the