Fed's Favorite Inflation Gauge Slowed In September

Key Takeaways

• The inflation rate, as measured by the Personal Consumption Expenditures price index, fell to a 2.1% annual rate, nearly reaching the Federal Reserve's target of 2%.
• The report was one of the last looks at the state of the economy voters will get before next Tuesday's election.
• While the overall inflation rate fell, core inflation, which excludes volatile prices for food and energy, stayed stubbornly above the Fed's target at 2.6% over the year.

The last inflation report before the general election showed price increases cooling nearly to the Federal Reserve's goal of a 2% annual rate.

The cost of living as measured by Personal Consumption Expenditures (PCE) rose 2.1% year-over-year in September, down from a 2.3% increase in August, the Bureau of Economic Analysis said Thursday. That was a fresh low since February 2021 and nearly down to the Federal Reserve's target of a 2% annual rate.

The inflation rate was in line with the expectations of forecasters according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.

Inflation Is Top-Of-Mind For Voters, Fed Officials

The report was a last official report ahead of Tuesday's election on inflation, an issue that voters have said is one of their biggest concerns, according to polls. Both candidates have emphasized their plans to subdue inflation that surged in 2021 and 2022.

The report was also the final one ahead of the Federal Reserve's next meeting in November. At that meeting, the central bank will decide whether to once again reduce its key fed funds rate, putting downward pressure on borrowing costs. The Fed made the first cut since 2020 in its last meeting, lowering the high interest rates it had maintained to subdue inflation.

Thursday's report showed the prices for most of the things people buy are increasing at rates similar to pre-pandemic levels. Although the inflation rate has fallen, the prices are still higher than they were before the pandemic.

No Clear Victory Yet For the Federal Reserve

Core inflation, which excludes volatile prices for food and energy, remained stubbornly high, running at 2.7% over the year, the same as in August, largely because of high housing costs.

The Fed pays more attention to core inflation when evaluating whether it's hitting its inflation target because food and energy prices can fluctuate for reasons unrelated to broader economic trends. The central bank prefers to measure inflation using PCE rather than other measures such as the Consumer Price Index.

Inflation picked up when measured on a month-over-month basis, rising 0.2% in September from August, up from a 0.1% increase the month before. Core prices rose 0.3% monthly, up from 0.2% in August.

The report also showed household finances improving, with income rising 0.3%, up from a 0.2% increase in August, and spending surging 0.5%, up from 0.3% the previous month. Resilient consumer spending has been a bright spot for the economy, powering economic growth over the past two years despite high borrowing costs for all kinds of loans.

Overall, the report did little to change financial markets' expectations that the Fed will cut its benchmark interest rate by 0.25 percentage points in November.

"The consumer is an unstoppable force, armed with solid labor and asset income, and a spendthrift attitude," Ali Jaffery, an economist at CIBC, wrote in a commentary. "The Fed is going to want to preserve the strength in the economy and today’s data, as well as yesterday’s strong GDP report, (which) still supports gradual rate reductions."

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