Inflation Rise in September Beats Expectations, Consumer Spending Surges
Inflation in the United States saw an acceleration in September, while consumer spending exceeded expectations, as reported the Commerce Department on Friday. The core personal consumption expenditures (PCE) price index, which is considered a crucial inflation indicator the Federal Reserve, rose 0.3% for the month, aligning with Dow Jones estimates and surpassing August’s 0.1% figure.
Despite the uptick in prices, personal spending remained robust, increasing 0.7%, outperforming the forecasted 0.5%. However, personal income only experienced a 0.3% rise, slightly below the estimated growth rate.
When factoring in the volatile prices of food and energy, the PCE index demonstrated a 0.4% increase. On a year-over-year basis, core PCE climbed 3.7%, a tenth lower than August, while headline PCE rose 3.4%, mirroring the previous month’s figure.
The Federal Reserve prioritizes core inflation as it provides a clearer outlook on long-term price trends. Although core PCE reached a peak of 5.6% in early 2022, it has since been steadily declining. However, it still remains significantly above the Fed’s annual target of 2%. The choice of PCE as the Fed’s preferred inflation measure is due to its consideration of changing consumer behavior, such as the substitution of lower-priced goods in response to price increases.
The market response to the report was relatively muted, with futures in the stock market showing slight gains and Treasury yields exhibiting a mixed performance across the curve.
Despite the faster-than-expected rise in consumer prices, core inflation continues to lose momentum. Therefore, this report is unlikely to alter the Fed’s viewpoint, which anticipates a slowdown in inflation in the coming months as demand cools down, according to Jeffrey Roach, the chief economist at LPL Financial. Roach further commented that consumer spending is expected to moderate after several months of outpacing income.
This report is the final inflation update that the Federal Reserve will receive before their upcoming two-day policy meeting next week. The CME Group’s prediction markets indicate a near 100% probability of the central bank announcing no interest rate hikes at the conclusion of the meeting on Wednesday.