Core prices climbed less than 3% annually in December for the first time since March 2021, per the Federal Reserve’s favorite inflation gauge, the Personal Consumption Expenditures (PCE) report.

Indeed, the PCE climbed 2.6% year-over-year in December, the same as in November, reflecting a monthly increase of 0.2%, slightly hotter than November’s -0.1% deflation.

The core PCE, which excludes volatile categories like Food and Energy, came in at just 2.9% in December, notably down from November’s 3.2% reading. This is even below forecasts of 3% core inflation from Bloomberg economists.

The Core PCE is the inflation gauge most frequently cited by Fed Chair Jerome Powell.

Consumer spending also increased 0.7% in November, better than estimates of a 0.5% increase. Personal income increased 0.3% month-over-month, in line with projections, though slightly worse than November’s 0.4% reading.

What Does the PCE Report Mean for Fed Rate Cuts This Year?

With inflation coming in even stronger than predicted, today’s PCE report has put the Fed in an interesting spot. Indeed, the importance of today’s inflation data lies in the implications it has on the central bank’s rate cut timeline.

The Fed has already established its plans to cut rates at least three times through the year, bringing the federal funds rate down to about 4.6% from its current range between 5.25%-5.50%. The major point of debate lies in when the central bank will make its move.

In this regard, today’s PCE should add to the mounting evidence that inflation is making major inlays toward the Fed’s 2% goal. This may give the central bank the nod to begin cutting rates, perhaps as early as March. Indeed, markets are pricing in a 40% chance of a rate cut coming in March, per the CME FedWatch Tool.

Some firms even believe the Fed may opt to cut rates even more than three times this year. This includes JPMorgan’s Chief U.S. Economist, Michael Feroli, who stated earlier this month he believes five quarter-point rate cuts are on the way this year, starting in June.

Either way, Fed Chair Powell should certainly be pleased with today’s PCE report, strengthening the case for a “soft landing” outcome.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.