The core Personal Consumption Expenditures (PCE) index, which removes food and energy from the inflation equation, increased 2.8% in the month of January, marking the lowest annual increase since March of 2021. It has been said by many that this index is the Federal Reserve's preferred gauge of interest. Will this finally be enough for the Fed to cut interest rates?

RSM US Economist Tuan Nguyen joins the Live show to discuss why he believes the US is inching closer to the finish line for the Fed's target inflation.

In terms of rate cuts, Nguyen says: "We think that there's quite a good chance that we might actually get to 2% by mid-year for the overall inflation, PCE inflation, and for core PCE inflation we might settle around 2.5%, all because of that cooldown in housing inflation. So that really continues to reaffirm our forecast that we made last December that we might expect the first rate cut around June this year."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

AKIKO FUJITA: Core PCE, personal consumption expenditures, the Fed's preferred inflation gauge, logged its lowest annual increase since March of 2021 in January, while monthly prices rose at the fastest rate in a year. While there is still work to be done on curbing inflation, our next guest believes we are inching closer to the finish line. For more on the latest inflation read, let's bring in Tuan Nguyen, RSM US economist. Tuan, good to talk to you today. How does this latest print fit in line with where you expect the economy to move?

TUAN NGUYEN: So it's definitely good news that the year-over-year inflation numbers are going down, but a lot of people are focusing on the month-over-month, and even the super core, that show stronger print than last month. We are not too worried, though, about the strong inflation print in January because all the seasonal factors and also the spike in housing inflation, which, if you look at it, is more like noise than trend.

So I do think, however, that given the rebound in energy and gasoline prices, we might see another strong number for inflation in February, ahead of the Fed's March meeting. But even if that's the case, we don't expect any kind of sharp rebound that really change the calculation for rate cuts in 2024. We think housing inflation will eventually come down in the summer and offset any kind of increases in goods inflation or energy inflation that everybody is concerned about. So if you look at the overall picture, we think that there are a lot of reasons to expect inflation to ease further in the summer.

AKIKO FUJITA: So, put the January numbers in context is what you're saying, just given the noise we usually see in that month. What does that mean in terms of when the Fed reaches that 2% target and when those interest rates cuts are likely to begin?

TUAN NGUYEN: So in our estimate, we think that there is quite a good chance that we might actually get to 2% by mid-year for the overall inflation, PCE inflation. And for the core PCE inflation, we might settle around 2.5% or, because of that, cool down in housing inflation. So, that really continues to reaffirm our forecast that we met last December, that we might expect a first rate cut around June this year.

Now, if you look at what has happened in the past three months, we had some good inflation news and the market kind of jumped ahead of itself to pricing earlier rate cuts than June. Now, the probability of rate cut, the first rate cut in June is about 70% in total, which is not 100%. So that is why we always want to stay away from changing our minds with only a few data points, especially after looking at the January data.

And we think that the Fed is in the same boat. They are not going to rush to cut rates too early. And by the summer, we think that the Fed will have about one year of inflation data that really supports lower interest rates.