The Federal Reserve’s preferred inflation measure softened to a near-three-year low in December, but personal spending continued to rise, helping further ratify expectations for a soft landing in the US economy – while slightly complicating the outlook for rate cuts.

Data released by the Bureau of Economic Analysis this morning showed the core personal consumption expenditures index rising 0.2 percent in December from the prior month, bringing the three-month annualized pace down to 1.5 percent, well within the central bank’s target range. On a year over year basis, core price growth slowed to 2.9 percent from 3.2 percent prior, and closely aligning with consensus estimates.

The overall personal consumption expenditures index was up 0.2 percent from the prior month, 2.6 percent higher than a year ago.

Personal income rose 0.3 percent month-over-month, decelerating from November’s 0.4-percent pace. Inflation-adjusted household spending climbed 0.5 percent, building on a 0.5-percent rise in the prior month to raise the three-month annualized change to 2.8 percent, up from 2.5.

Jerome Powell’s favourite “supercore” inflation measure – core services excluding housing rents – slowed to 3.3 percent year-over-year, the weakest in almost three years.

Front-end yields are inching higher and the greenback is slipping as traders adjust expectations for rate cuts in the coming months. The case for rules-driven rate cuts has grown substantially stronger, but solid underlying demand suggests that Fed officials should maintain a cautious stance for now, heeding the lessons of history in waiting for sustained evidence of disinflation before easing policy in a more aggressive manner.

Contributors to change in personal consumption expenditures index, month-over-month % change