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.
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 that they may play a sizable factor in 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.
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 [consumer price index (CPI)] and [producer price index (PPI)] 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 on 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, chief economist for Comerica Bank, said the Fed will be pleased by the overall downward inflation trend—and positive gross domestic product (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 [percent] 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.”
Third-quarter GDP rose slightly more slowly than expected, by 2.8 percent, down from 3 percent in the second quarter.
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.
