Federal Reserve’s Preferred Inflation Gauge Unchanged in September at 3.4 Percent
Federal Reserve’s Preferred Inflation Gauge Unchanged in September at 3.4 Percent

By Andrew Moran

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 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, down from 3.8 percent in August. This was in line with market forecasts and represented the lowest reading since May 2021.

Core PCE jumped 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 this past 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 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, higher than economists’ expectations of 0.5 percent and up from the August reading of 0.4 percent. Moreover, the personal savings rate plunged for the fourth consecutive month to 3.4 percent, down from 4 percent.

Within the income category, private workers’ wages eased to 3.9 percent year-over-year, down 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.

Financial markets mostly ignored the latest inflation data, as the leading benchmark indexes were roughly flat in pre-marketing trading on Oct. 27.

U.S. Treasury yields were mixed, as the benchmark 10-year yield rose above 4.86 percent. The 2-year yield dipped below 5.03 percent, while the 30-year bond firmed above the 5 percent mark.

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.

According to the September Summary of Economic Projections, Fed officials do not see the PCE and core PCE reaching the institution’s 2 percent target until 2026.

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 (FOMC) policy meetings, keeping the benchmark fed funds rate at a range of 5.25 percent and 5.50 percent.

Appearing before the Economic Club of New York on Oct. 19, Fed Chair Jerome Powell offered mixed signals on the path of monetary policy.

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 warranted 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.

In the third quarter, the GDP growth rate accelerated at 4.9 percent, fueled by exceptional consumer and government spending levels.

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.

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