Headline inflation for September moved closer to the Fed’s target

Prices rose moderately last month, in line with the Federal Reserve’s preferences. measure of inflationgiving the central bank flexibility ahead of Friday’s jobs report.

The Bureau of Economic Analysis (PCE) Personal Consumption Price Index for September rose 2.1% year over year, up from a 2.3% rise in August and the weakest since the start of 2021.

Core PCE, on which the Fed bases its annual 2% inflation target, remained steady at 2.7% year-over-year growth. Core PCE excludes volatile cost categories associated with commodities, such as food and energy. On a month-on-month basis, overall prices rose 0.2% in the core PCE index and 0.3% in the core value. The growth in the core indicator was the highest since April.

The moderate acceleration in price growth was expected by both financial market participants and policymakers, and it increases the likelihood that the Federal Open Market Committee will cut its rate. base interest rate at its meeting next week.

Thursday’s PCE reading is the latest major inflation report for the month, following the Bureau of Labor Statistics’ Consumer Price Index (CPI) and Product Price Index (PPI), both of which showed price gains holding steady in September.

At its September meeting, the FOMC lowered its target range for the federal funds rate by half a percent — double the usual adjustment interval — noting increased sensitivity to the impact of policy on the labor market. The group forecasts further rate cuts this year and through 2025.

Thursday’s PCE reading appeared to bolster market confidence in further rate cuts next week. Before the report, more than 92% of fed funds futures traders were forecasting a 25 basis point decline, compared with 7.5% who expected no change, according to CME Group’s Fedwatch tool. After the report, trading volume decreased by 96%.

IN speech earlier this monthFed Chairman Christopher Waller said analysts forecast core PCE to increase 0.25% last month. He noted that higher interest rates have created “subdued demand” among consumers for big-ticket items, and now that borrowing costs are falling, many are looking to make those purchases.

Waller said such a rise would not be a “welcome development” in the Fed’s efforts to curb inflation, but as long as the index remains near the Fed’s 2% target, one higher reading is not a cause for concern.

“We’ve made significant progress in tackling inflation over the last year and a half, but that progress has clearly been uneven – at times it feels like we’re on a roller coaster,” he said. “It remains to be seen whether this month’s inflation data is just noise or whether it signals continued growth. I will be watching the data closely to see how sustainable this recent growth is.”

Other Fed officials were less optimistic about the latest data. Fed Chairman Michelle Bowman – who voted against FOMC rate cut by 50 basis points in September – in his speech on September 30, he said that core PCE was “uncomfortably above” the Fed’s target. She added that she views a resurgence in inflation as a significant risk.

“While this is not my baseline forecast, I cannot rule out the risk that progress in inflation could stall further,” Bowman said.

Federal Reserve Chair Adriana Kugler, who “strongly supported” last month’s half-point cut and a pivot to focusing on protecting the labor market, said in an Oct. 8 speech that the FOMC must be prepared to respond to downside risks that threaten either employment or price stability.

“If downside risks to employment increase, it may be prudent to move policy more quickly to neutral,” Kugler said. “Alternatively, if incoming data does not provide confidence that inflation is sustainably approaching 2%, it may be appropriate to slow down the policy rate normalization.”

The Fed is still awaiting one more important set of data ahead of next week’s FOMC meeting: the Bureau of Labor Statistics’ Employment Situation report, which will detail overall wage gains and jobless claims for September. That report is due out Friday morning.