The Federal Reserve’s key inflation measure, the Personal Consumption Expenditures (PCE) Index, exhibited a continued cooling of prices in September, a pivotal development that will influence the Fed’s impending interest rate decision scheduled for November 1.
According to data released on Thursday by the Commerce Department, the PCE Index showed a year-over-year growth of 3.4% in September, aligning with the revised increase from August and meeting analysts’ expectations.
The “Core” PCE, an indicator that excludes the volatile food and energy sectors, registered a 3.7% growth, a marginal drop from a revised 3.8% in August, consistent with the projections of economists surveyed by Bloomberg. The Core PCE holds particular significance for the Fed as it directly contributes to the Gross Domestic Product (GDP), differentiating it from the more widely cited Consumer Price Index (CPI).
Economist Michael Pearce of Oxford Economics remarked on the core PCE figure, noting that it “reflects the stickiness of core services inflation, which is still too strong to be consistent with inflation falling back to the Fed’s 2% target.”
In terms of month-over-month data, core PCE experienced a 0.3% rise in September, marking an increase from the 0.1% uptick observed in August, which was the lowest rate recorded since November 2020. This 0.3% surge represents the most significant jump in four months, attributed to accelerated spending on items such as automobiles, prescription drugs, and travel.
Personal spending outpaced personal income, with a 0.7% increase compared to a 0.3% rise in income.
Pearce observed, “Disposable income growth has come under pressure as wage and job growth slows,” adding that this decline also indicates a slight fiscal tightening due to diminishing transfer payments and increasing tax obligations.
He further noted, “While we estimate there is still a considerable stock of excess saving left over from the pandemic, that is now mostly concentrated among higher income households and appears to be increasingly treated as wealth, so we expect the boost to spending from lower saving to wane from here. We also expect some increase in precautionary saving as the job market slows.”
The price of goods experienced a 0.9% increase in September from the previous year, surpassing August’s 0.7% rise. Durable goods continued to decline, falling by 2.3% after a 1.9% decrease in August, while non-durable goods showed a 2.7% increase.
In government data released on Thursday, the US economy exhibited its swiftest growth in nearly two years over the past three months, propelled by robust consumer spending despite a high-interest rate environment. This impressive GDP performance is juxtaposed against persistently high inflation levels, surpassing the Federal Reserve’s 2% target.
While certain segments of the labor market are showing signs of softening, overall conditions remain tight, indicating a potential for the Federal Reserve to persist with interest rate hikes. The most recent meeting minutes from the Federal Reserve suggest support for a more restrictive rate environment.
Cleveland Fed President Loretta Mester conveyed last week that she still envisions the possibility of one more rate hike this year. Nevertheless, market expectations lean towards the central bank maintaining steady rates in its upcoming meeting later this month. Following the data release, markets reflected a roughly 99% probability that the Federal Reserve will leave rates unchanged at the forthcoming policy meeting, according to data from the CME Group.
In the services sector, prices saw a 4.7% increase, slightly below August’s 4.9% uptick. Food prices also moderated, with September’s reading reflecting a 2.7% yearly rise compared to a 3.1% surge in August. Energy goods and services remained flat in September after a 3.6% decline in August.
Source: Yahoo Finance
