The Fed’s Preferred Inflation Index Eases Closer to 2% Target
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Economists expected the Personal Consumption Expenditures price index, the Federal Reserve's preferred measure of inflation, to slow to 2.1% in September. |
Inflation has continued its decline, bringing the economy within a narrow margin of the Federal Reserve’s target rate of 2%. The Personal Consumption Expenditures (PCE) price index, the Fed's chosen inflation indicator, rose by only 2.1% for the year ending in September, a dip from 2.3% in August. This three-and-a-half-year low aligns with expectations, adding momentum to the speculation that the Fed might continue with interest rate cuts in the near future.
In addition to cooling inflation, U.S. economic indicators point toward continued growth, as consumer incomes and spending levels also climbed in September. According to Olu Sonola, head of U.S. economic research at Fitch Ratings, the consistent growth combined with a stable labor market and disinflationary trends supports the likelihood of a rate cut.
Monthly Price Trends and Core Inflation
On a monthly basis, prices rose 0.2% due in part to higher food prices, but falling gas prices balanced this increase. In several states, gas prices have dropped below $3 per gallon, a trend analysts expect to persist with global supply exceeding demand.
Excluding volatile food and energy prices, core PCE inflation remained steady at an annual rate of 2.7%, influenced by enduring price pressures in housing, real estate, and insurance sectors. However, Gregory Daco, chief economist at EY Parthenon, notes that inflation is now close enough to the Fed’s target that a recalibration away from tight monetary policy is warranted.
The Fed started this shift in September with a substantial half-point rate cut, although the decision was met with mixed opinions among Fed policymakers. Current projections indicate two more modest cuts by the end of the year, with a quarter-point cut expected next week according to the CME FedWatch Tool.
Rising Income and Spending Signal Economic Stability
The PCE price index, part of the Commerce Department’s monthly Personal Income and Outlays report, also shows that income and spending are on the rise. In September, personal income rose 0.3%, while spending increased by 0.5%. Adjusted for inflation, spending growth reached 0.4%.
The strong spending, however, has slightly outpaced income growth, resulting in a dip in the savings rate to 4.6%. Despite this, revised savings figures indicate that consumers are not overstretched. Gus Faucher, chief economist at PNC, observed that the robust labor market and wage gains should sustain a steady rate of consumer spending, supporting ongoing economic growth.
The U.S. labor market remains resilient, though the upcoming October jobs report may show temporary declines due to strikes and hurricane impacts. Economists predict a net job gain of 117,500 for October, a decrease from September’s increase of 254,000. Without these temporary setbacks, underlying job growth remains strong.
For more updates on U.S. economic developments, visit World News.
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