The personal consumption expenditure (PCE) price index—the Federal Reserve’s preferred inflation gauge—was unchanged at an annual rate of 3.4 percent in September, according to the Bureau of Economic Analysis (BEA).
Economists had widely anticipated that the PCE would be unchanged.
On a monthly basis, the PCE rose by 0.4 percent, slightly higher than the consensus estimate of 0.3 percent.
The Core PCE price index, which omits the volatile energy and food components, eased to 3.7 percent year-over-year, from 3.8 percent in August. That was in line with market forecasts and represented the lowest reading since May 2021.
Core PCE jumped by 0.3 percent month-over-month, up from 0.1 percent in August.
Inflation pressures have been revived in recent months as crude oil prices have rallied since the end of June amid growing global supply deficit fears.
The PCE reaccelerated during the summer, rising to 3.4 percent in July and 3.5 percent in August. While inflation is decelerating at a sluggish pace, the PCE has still eased from a 40-year high of 7.1 percent in June 2022. At the same time, prices continue to rise at roughly double the Federal Reserve’s 2 percent inflation target.
The U.S. central bank places more emphasis on the PCE than the consumer price index as a measure of inflation. The PCE covers more of the U.S. economy and gauges how much households spend on their expenditures. In contrast, the Consumer Price Index (CPI) reflects adjustments of a fixed basket of goods and services.
Earlier this month, the September CPI was unchanged at a higher-than-expected 3.7 percent. The core CPI dipped to 4.1 percent.
Additional BEA data highlighted a divergence between income and spending levels.
Last month, personal income levels rose at a smaller-than-expected pace of 0.3 percent, down from 0.4 percent. Personal spending surged 0.7 percent, topping economists’ expectations of 0.5 percent and an increase from the August reading of 0.4 percent. Moreover, the personal savings rate plunged for the fourth consecutive month, to 3.4 percent from 4 percent.
Within the income category, private workers’ wages eased to 3.9 percent year-over-year, from 4.5 percent, and the lowest print since February 2021. But government workers’ wages surged to 7.8 percent and inched closer to the all-time high of 8.7 percent that was recorded in October 2021.
Meanwhile, renewed selling on concern of a recession dragged the Dow Jones Industrial Average lower and pushed the S&P 500 into correction territory on Oct. 27, as all three major averages registered steep weekly losses.
Reading the Economic Tea Leaves
Looking ahead to the October PCE, the Cleveland Fed Bank’s Inflation Nowcasting anticipates it will ease to an annual rate of 3.2 percent. On a monthly basis, the PCE is expected to rise by 0.2 percent.Economists note that even with a slower-than-expected battle with inflation, the Fed is unlikely to raise interest rates. The futures market has priced in a rate pause at the November and December Federal Open Market Committee policy meetings, keeping the benchmark fed funds rate at a range of 5.25 percent to 5.50 percent.
Mr. Powell hinted that the central bank could be finished with rate hikes but left the door open to further increases if the economic data warrant additional tightening.
“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” he stated. “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
The Fed chair has noted that the U.S. economy needs to record below-trend growth and softer labor conditions to achieve the central bank’s 2 percent target.
On the jobs front, the economy created 336,000 new jobs in September, and the unemployment rate remained below 4 percent.
At the same time, the consensus among various central bank officials and market observers is that the Fed will keep interest rates higher for longer.
