Fed’s preferred inflation gauge ticks up, but overall trend softens
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The news: The US personal consumption expenditures (PCE) price index rose 2.1% annually in September, with a monthly gain of 0.2%, matching forecasts. That follows 2.3% annual growth in August and 0.1% monthly, according to the Bureau of Economic Analysis.
The context: The data seems to bolster the case for a slower pace of interest-rate cuts by the Fed next week, following its 50 basis-point rate reduction in September.
The central bank has lately been focused on supporting the jobs market to avoid high levels of unemployment as the economy cools. But with inflation ticking up higher amid solid economic growth and consumption, economists are warning the Fed is likely to slow down and even pause interest rate cuts due to fears about a re-acceleration of inflation.
The numbers: The core PCE index, which excludes food and energy and is the Federal Reserve’s preferred measure of underlying inflation, rose by a steady 2.7% annually – the same rate as in August – and 0.3% monthly – up from 0.2% monthly growth in August – signalling persistent price pressures.
Consumer spending rose 0.4% inflation-adjusted, backed by wage increases, while the savings rate dropped to 4.6%, its lowest since 2023.
Separate data published by the Bureau of Labor Statistics showed employment costs increased by 0.8% in the third quarter, showing moderation with the smallest advance since mid-2021.
In annual terms, compensation costs rose 3.9%, down from 4.3% in September 2023 and 4.1% this June.
What they said: "Even though Thursday’s core PCE moved only slightly higher, we believe this is the first in a series of months and quarters where we see an increase in inflation. Investors should be prepared for a re-acceleration of inflation in late 2024 and early 2025," Michael Landsberg, CIO at Landsberg Bennett Private Wealth Management told Reuters via email.
"We believe the Fed is still poised to cut interest rates in November by 25 basis points, but we believe the Fed will pause any rate cuts in December amid fears about a re-acceleration of inflation."
Peter Cardillo, chief market economist at Spartan Capital Securities said: “The suggestion that inflation could tick up a bit more was basically confirmed in today's number, and the sticky part here is the core rate, which continues to move higher.”
“And that just simply means that the Fed could very well pause at its next meeting. I think the chances of a Fed pause is greater now than ever.”
Stuart Paul and Estelle Ou, economists at Bloomberg Economics said: “The decline in saving helped prop up spending throughout the third quarter. With the Fed’s attention rotating more toward the full-employment aspect of its dual mandate, we think the steady annual core inflation measure won’t sway the Fed from its rate-cutting path.”
The sources: Bureau of Economic Analysis , US Bureau of Labour Statistics , Bloomberg, Reuters
