Federal Reserve’s Preferred Inflation Metric Ticks Up as Services Fuel Price Pressures

‘Will this cause the Fed to skip December? We think it should,’ said Nancy Tengler, CEO and CIO at Laffer Tengler Investments.
Federal Reserve’s Preferred Inflation Metric Ticks Up as Services Fuel Price Pressures
People shop at a grocery store in New York City on Aug. 14, 2024. Spencer Platt/Getty Images
Andrew Moran
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The Federal Reserve’s preferred inflation measure—the personal consumption expenditure (PCE) price index—edged up in October as services continued to fuel price pressures.

According to the Bureau of Economic Analysis (BEA), annual PCE price index inflation rose to 2.3 percent last month from 2.1 percent in September. The index jumped by 0.2 percent monthly and aligned with the consensus forecast.

Core PCE inflation, which omits the volatile energy and food categories, ticked up to 2.8 percent, up from 2.7 percent. This, too, was in line with market estimates. Core PCE increased by 0.3 percent from September to October.

Prices for goods tumbled by 0.1 percent, and prices for services surged by 0.4 percent. From the same time a year ago, costs for goods declined by 1 percent, and prices for services advanced by 3.9 percent.

Food and energy prices were flat last month.

Services remain a challenge for the Fed as a broad array of categories tick higher or remain elevated, such as transportation, medical, and shelter.

Fed policymakers value the PCE more than the consumer price index (CPI) because the former maintains a broader scope of expenditures and uses more accurate weighting. By relying on a more comprehensive metric, the Fed can more accurately guide its mandate of price stability.

The PCE report further revealed that personal income advanced at a higher-than-expected pace of 0.6 percent, up from 0.3 percent in September. Personal spending also swelled at a higher-than-expected rate of 0.4 percent, down from 0.6 percent.

The next major inflation reading will be the November CPI report later next month.

According to the Cleveland Fed’s Inflation Nowcasting model, CPI and core CPI inflation are expected to come in at 2.7 percent and 3.3 percent, respectively.
Additionally, November PCE and core PCE inflation readings are anticipated to clock in at 2.5 percent and 2.9 percent, respectively.

Market Reaction

Financial markets little changed midweek, with the leading benchmark indexes seesawing before positive and negative territory.

U.S. Treasury yields were in a sea of red ink as the benchmark 10-year yield fell below 4.26 percent.

The U.S. dollar index, a gauge of the buck against a basket of currencies, plunged below 107.00. But the index is poised for a November gain of more than 2 percent.

The futures market widely believes the Fed will follow through on a quarter-point interest rate cut at next month’s meeting, representing the third consecutive reduction to the benchmark federal funds rate.

“As long as we don’t get some ugly inflation readings going forward, it should be likely they begin to cut rates,” Ken Mahoney, CEO of Mahoney Asset Management, said in a note emailed to The Epoch Times.

Traders work on the floor at the New York Stock Exchange as Federal Reserve Chairman Jerome Powell speaks after announcing a rate increase, in New York City on Nov. 2, 2022. (Seth Wenig/AP Photo)
Traders work on the floor at the New York Stock Exchange as Federal Reserve Chairman Jerome Powell speaks after announcing a rate increase, in New York City on Nov. 2, 2022. Seth Wenig/AP Photo

The consensus among market watchers is that inflation is on the decline. The Fed’s September Summary of Economic Projections, for example, indicated that the median inflation rate will be 2.1 percent in 2025 and 2 percent in 2026.

But inflation’s trajectory is emulating the last major inflation episode from the 1970s and 1980s, says Torsten Slok, chief economist at Apollo Global Management.

“Combined with the observed acceleration in average hourly earnings in recent months, the risks are rising that inflation could begin to move higher again,” Slok said in a note to The Epoch Times.

Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, is also concerned that inflation could be stickier than believed.

While the Atlanta Fed’s sticky CPI inflation model dipped below 4 percent last month, the University of Michigan’s one- and five-year inflation outlooks are higher than expected, which “confirms our view,” she said.

“Will this cause the Fed to skip December? We think it should,” Tengler said in a note emailed to The Epoch Times.

Minutes from the November Fed policy meeting indicate that the monetary authorities were confident that inflation is heading sustainably toward the institution’s 2 percent target. Officials also attributed the recent uptick in inflation to shelter pressures.

“Participants cited various factors likely to put continuing downward pressure on inflation, including waning business pricing power, the committee’s still-restrictive monetary policy stance, and well-anchored longer-term inflation expectations,” the meeting summary reads.

At the post-meeting press conference earlier this month, Fed Chair Jerome Powell noted that monetary policy is in a good place. If inflation pressures are revived, the Fed can pause its rate-cutting cycle. Or, if the labor market suddenly weakens or the broader economy slumps, the central bank can be more aggressive in lowering interest rates.

The next two-day rate-setting Federal Open Market Committee meeting will take place on Dec. 17–18.

Other Economic Data

The U.S. government released a flurry of economic data ahead of the Thanksgiving holiday.
Durable goods orders rose at a smaller-than-expected pace of 0.2 percent, up from the previous month’s upwardly revised negative 0.4 percent, according to the Census Bureau.
The BEA’s second estimate for the third-quarter GDP growth rate remained the same at 2.8 percent.
According to the Department of Labor, initial jobless claims—a gauge of the number of applications for unemployment benefits—were flat at 213,000 for the week ending Nov. 23.
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."