Key U.S. Inflation Gauge Picks Up

The Federal Reserve’s preferred measure of underlying U.S. inflation posted its biggest monthly gain since April, bolstering the case for a slower pace of interest rate cuts following last month’s outsized reduction.

The so-called core personal consumption expenditures (PCE) price index, which strips out volatile food and energy items, increased 0.3 percent in September and 2.7 percent from a year earlier, according to Bureau of Economic Analysis (BEA) data out today. Overall inflation was 2.1 percent, the lowest since early 2021 and just above the central bank’s 2 percent goal.

Inflation-adjusted consumer spending advanced 0.4 percent, an acceleration from the prior month supported by continued growth in wages and salaries. The savings rate fell to 4.6 percent, the lowest since 2023.

Thursday’s figures cap a month of upside surprises in key economic reports that will likely augur a cautious approach to rate cuts in the months ahead. The Fed is widely expected to authorize a second reduction at the conclusion of its policy meeting on November 6 and 7, following an initial cut in September.

“The new information is the trajectory of consumption heading into this quarter. The increase in real consumer spending in September puts it on a favorable course, removing some downside risk to our forecast,” Ryan Sweet, chief U.S. economist at Oxford Economics, said in a note. “Growth in real disposable income is a little light, but with inflation expected to decelerate a little, household purchasing power will get a lift.”

Major stock indexes opened lower following the release, while Treasury yields rose.

Details of the September inflation numbers showed a bump in price pressures across both goods and services. Services prices excluding housing and energy rose 0.3 percent, marking an acceleration from the prior month. Goods prices excluding food and energy rose 0.1 percent, while food prices were up 0.4 percent, the most since early this year.

The spending data pointed to ongoing consumer resilience, particularly for merchandise purchases. Overall services spending, which makes up the bulk of household consumption, rose 0.2 percent in September. Goods spending advanced 0.7 percent, as shoppers took advantage of a trend toward lower prices this year.

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What Bloomberg Economists Say…

“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.”

— Stuart Paul & Estelle Ou, economists

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Wages and salaries rose 0.5 percent for a second month before adjusting for inflation, supporting spending. Inflation-adjusted disposable incomes rose just 0.1 percent, however, due to declines in interest income and proprietors’ incomes.

The data offer mixed news for voters seeking to get a sense of where the economy stands heading into the November 5 election, with consumers continuing to spend despite a high cost of living, which has played a key role in the presidential campaigns.

One bright spot was the cost of gasoline and other motor fuels: It fell 4 percent on the month, and consumers spent just 3 percent of their wages and salaries on the category, the least since early 2021.

Thursday’s figures follow initial estimates of third-quarter gross domestic product (GDP) published Wednesday by the BEA, which showed robust economic growth powered by a resilient consumer and a surge in defense spending.

Separate data published Thursday by the Bureau of Labor Statistics (BLS) showed that growth in employment costs moderated in the third quarter. The employment cost index rose 0.8 percent, the smallest advance since mid-2021. The more temperate reading aligns with Fed Chair Jerome Powell’s assessment last month that “the labor market is not a source of elevated inflationary pressures.”

While hiring has generally moderated over the past year, layoffs remain low. Initial claims for U.S. unemployment benefits fell last week to their lowest since May as southeastern states continued to recover from the impact of two severe storms. Continuing claims, a proxy for the number of people receiving benefits, also declined, falling to 1.86 million in the week ended October 19.

The BLS will provide its monthly update on hiring and unemployment for October tomorrow.

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