Fed Inches Closer to 2 Percent Inflation Target in September PCE Report

‘Reports are consistent with the Fed making another interest rate cut at their post-election decision next week,’ economist Bill Adams said.
Fed Inches Closer to 2 Percent Inflation Target in September PCE Report
A shopper makes her way through a grocery store in Miami, Fla., on July 12, 2023. Joe Raedle/Getty Images
Andrew Moran
Updated:

The personal consumption expenditure (PCE) price index—the Federal Reserve’s preferred inflation gauge—continued to slow in September as the central bank inched closer to reaching its 2 percent inflation target.

The annual PCE inflation rate eased to 2.1 percent last month, down from 2.3 percent in August, according to the Bureau of Economic Analysis (BEA). This was the lowest since February 2021. The PCE price index rose by 0.2 percent monthly, up from 0.1 percent in August.

This was in line with economists’ expectations.

Goods prices fell by 0.1 percent while services swelled by 0.3 percent, with food costs, motor vehicles and parts, and prescription drugs the leading contributors.

On the services front, health care, housing, and utility costs were the biggest factors.

Energy costs maintained their downward trend as crude oil prices slumped in September. They have been highly volatile throughout October, and early forecasts suggest they may play a sizable factor in the inflation reports in the coming month.

Core PCE, which omits the volatile energy and food components, was unchanged at a year-over-year increase of 2.7 percent, slightly higher than expected. Core PCE also jumped by 0.3 percent month-over-month, up from 0.1 percent.

Personal spending surged at a higher-than-expected pace of 0.5 percent, while personal incomes edged up by 0.3 percent.

Looking ahead to next month’s PCE report, the Cleveland Fed’s Inflation Nowcasting model estimates that the index’s inflation will be 2.2 percent and core PCE inflation will be 2.7 percent.
The updated September Summary of Economic Projections suggests that officials expect that the median PCE inflation rate will be at or slightly above the 2 percent objective in 2025 and 2026.

Market Reaction

The latest PCE figure could be the most important data point for the Fed as it heads into next week’s two-day Federal Open Market Committee policy meeting, Freedom Capital Markets Chief Global Strategist Jay Woods said.

“Unlike the CPI [consumer price index] and PPI [producer price index] numbers, we haven’t had many upside surprises in the PCE as it continues to slowly trend lower,” Woods told The Epoch Times.

While PCE inflation continues to trend toward the central bank’s 2 percent target, policymakers and investors are concerned about any uptick amid cuts to interest rates.

“The fear is that any tick higher means inflation is beginning to trend the wrong way and that maybe the recent half-point cut was premature and future cuts may be detrimental to a declining PCE,” Woods said.

The Fed focuses more on the PCE than the CPI to understand inflationary pressures. PCE examines a broader range of expenditures and reflects changes in consumer spending behaviors, giving the monetary authorities a comprehensive and dynamic inflation gauge to craft policy.

Bill Adams, the chief economist for Comerica Bank, says the Fed will be pleased by the overall downward inflation trend—and positive GDP data—heading into the November policy meeting.

“The Fed will be glad to see another solid quarter of economic growth, and pleased that ADP reported solid job growth in October. They will be even happier to see inflation moderated in the third quarter, and is running near their 2% target,” Adams told The Epoch Times. “The GDP and ADP reports are consistent with the Fed making another interest rate cut at their post-election decision next week, but a smaller quarter percentage point one. They are not in emergency mode.”

The BEA reported that PCE inflation eased to a smaller-than-expected rate of 1.5 percent in the third quarter, down from 2.5 percent in the second quarter. Core PCE inflation slowed to 2.2 percent, though slightly higher than the market forecast of 2.1 percent.

Third-quarter GDP rose slightly slower than expected, by 2.8 percent, down from 3 percent in the second quarter.

According to the ADP National Employment Report, the private sector added 233,000 new jobs in October, topping the consensus estimate of 115,000. This is also up from the 159,000 new payroll additions in September, which were revised higher from 149,000.

U.S. stocks were still in the red after the PCE inflation data before the opening bell. Leading benchmark indexes were down by as much as 0.7 percent.

The U.S. Treasury market was primarily up across the board, with the benchmark 10-year yield topping 4.29 percent. The 2-year and 30-year Treasury yields added to this week’s gains.
The U.S. dollar index, a gauge of the greenback against a basket of currencies, fell below 104.00. The index is poised for an October gain of nearly 2 percent, adding to its year-to-date increase of 2.5 percent.
Andrew Moran
Andrew Moran
Author
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."