Inflation has slowed further and is just a hair’s breadth from the Federal Reserve’s 2% target.
The Personal Consumption Expenditures price index, which is the Fed’s preferred inflation gauge, showed prices rose 2.1% for the year ended in September, a slowdown from 2.3% in August, according to Commerce Department data released Thursday.
The annual increase, which marks a fresh three-and-a-half-year low, fell right in line with what economists were expecting, according to FactSet consensus estimates.
The latest inflation reading provided further confirmation that these atypically high price hikes have been tamed, fueling expectations for the Federal Reserve, which has a meeting next week, to continue cutting interest rates.
Friday’s report also contained even more good news for Americans and economic activity: Incomes continue to grow, and consumers continue to spend and keep the economy churning.
“The die is more or less cast for a rate cut next week, and the totality of the incoming data we’ve seen thus far this week supports that decision,” Olu Sonola, head of US economic research at Fitch Ratings, said in commentary issued Thursday. “The bottom line is that the labor market remains strong, inflation is broadly disinflationary with some bumps along the road, and economic growth is solid.”
On a monthly basis, prices rose 0.2%, boosted in part by rising food prices, according to the report. However, falling gas prices helped to keep the lid on any gains.
Many states are seeing gas prices below $3 a gallon, a trend that’s expected to continue in the coming weeks as global supply eclipses demand.
What’s next for the Fed
Given that gas and food prices can be quite volatile and heavily influenced by aspects such as weather, war and disease, a closely watched measure of underlying inflation excludes those two components: The core PCE price index rose 0.3% in September to hold pat at an annual rate of 2.7% for the third month in a row.
Some of the factors keeping core PCE in that stubborn state are somewhat sticky price pressures in real estate and housing as well as insurance, Gregory Daco, EY Parthenon chief economist, told CNN in an interview.
“But, generally speaking, inflation is within striking distance of the Fed’s 2% target, and I think that these latest readings indicate that it’s more than time for the Fed to recalibrate monetary policy away from the restrictive stance that it adopted when inflation was closer to 6%,” Daco said.
The Fed started those efforts in September with a bigger-than-expected half-point rate cut; however, meeting minutes released earlier this month showed that not all central bankers were on board with not just that big move but cutting overall.
Still, Fed projections and Chair Jerome Powell have indicated that two smaller cuts will likely close out the year. Market expectations overwhelming project the Fed will make a quarter-point cut at its meeting next week, according to the CME FedWatch Tool.
An economy on solid ground
The PCE price index is part of the Commerce Department’s monthly Personal Income and Outlays report, which includes comprehensive data on how Americans earn, spend and save.
Income and spending both rose for the month, up 0.3% and 0.5%, respectively. Adjusting for inflation, spending rose 0.4%.
With spending outpacing income gains (including disposable income increases that were also up 0.3%), consumers drew down their savings more.
The saving rate (personal saving as a percentage of disposable income) fell to its lowest point of the year, at 4.6%. However, there was a large upward revision to the saving rate, which reduces some concerns about overstretched consumers, Gus Faucher, PNC chief economist, wrote in a note to clients on Thursday.
“Spending growth was especially strong in September, and cannot continue to indefinitely outpace income growth,” Faucher wrote. “But with the labor market remaining sturdy and good job and wage gains, consumer spending can increase at a steady pace, powering overall economic growth.”
The US labor market has remained on solid ground, but Friday’s jobs report could be anything but that.
The October jobs report is expected to be highly distorted by striking workers as well as the effects of hurricanes. A common thread among economists is that those events could sap a combined 100,000 jobs from October’s payroll gains.
Consensus estimates are for a net gain of 117,500 jobs to be reported Friday, according to FactSet. That would be a sharp decline from the 254,000-job increase reported for September; however, excluding the temporary distortions, the baseline job growth would still be historically strong.
