The Fed’s preferred measure of inflation eased in October

CNN Business
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A key measure of consumer prices slowed somewhat in October, another hopeful sign that inflation pressures may be moderating.

The Commerce Department reported Thursday that the personal consumption expenditures price index, or PCE, rose 6% in October compared to a year earlier. This is down from the upwardly revised 6.3% annual increase reported for September.

PCE is the Fed’s preferred measure of inflation because it gives a more complete picture of consumer prices.

Prices rose 0.3% in October compared to September, the same monthly increase as in each of the previous two months.

Excluding volatile food and energy, primary PCE consumption rose 5% over the past 12 months and 0.2% month over month. That compares with an upwardly adjusted annual increase of 5.2% in September, and a monthly jump of 0.5%.

The 12-month gain in core personal consumption expenditures matched expectations of economists polled by Refinitiv, while the one-month gain was slightly less than the 0.3% rise that had been expected.

Inflationary pressures have become a major concern for the US economy, prompting the Federal Reserve to do so Raising interest rates at an unprecedented rate trying to control prices.

Federal Reserve Chairman Jerome Powell said in a speech on Wednesday that the Fed may reverse the pace of its aggressive rate hikes as soon as December. While Powell stressed the importance of not relying on a particular data point, Thursday’s inflation reading will likely confirm that plan.

“Given these inflation data, the Fed should take comfort in a downward shift in the pace of rate hikes at the next meeting,” Jeffrey Roach, chief economist at LPL Financial, wrote in a note on Thursday.

The PCE report also showed significant jumps in personal income and personal spending. Personal income jumped 0.7% in October, up from 0.4% in September. Individual spending rose 0.8% in the latest reading, and by 0.5% when the impact of higher prices is taken into account. It was the biggest jump in inflation-adjusted spending since January. The main drivers of increased spending were new cars and trucks, furniture and other expensive items for home and dining out.

Both readings could fuel underlying inflation pressures going forward. Increased demand for goods and services can push up prices unless there is a corresponding increase in supply to meet that demand. Higher incomes – fueled by a strong labor market – tend to increase demand.

“Consumer spending figures… included in this month’s release show that households, too, seem refusing to abandon their spending habits in the face of the gathering economic storm clouds,” Kurt Rankin, chief economist at PNC, wrote in a note Thursday.

“A return to higher-cost household spending… could be a classic sign of self-sustaining inflation. When a consumer sees a sustained price hike, they tend to buy now rather than risk a higher price in the future.”

But if the report was a mixed bag of data for the Federal Reserve, with low inflation balancing high income and spending, the mix was good news for the Biden administration, which took the unusual step of commenting on a report that rarely gets the attention of the White House.

“We are seeing initial signs that we are making progress on tackling inflation, even as we transition to more sustained and stable economic growth,” President Joe Biden wrote in a statement released Thursday morning. “The American people must have confidence that our plan to tackle inflation, without giving up all of the historic economic gains made by American workers, is working.”

This story is developing and will be updated.