In October, inflation slightly increased as reported by the Commerce Department on Wednesday, while the Federal Reserve sought insights on potential interest rate adjustments.
The personal consumption expenditures price index, a key inflation metric for the Fed, rose by 0.2% monthly, with a 12-month inflation rate of 2.3%. These figures aligned with the Dow Jones consensus forecast, with the annual rate surpassing September’s 2.1% level.
Core inflation, excluding food and energy, displayed stronger figures, with a 0.3% monthly increase and an annual rate of 2.8%, meeting expectations. The annual rate was 0.1 percentage point higher than the previous month.
In October, services prices drove most of the inflation, increasing by 0.4%, while goods saw a 0.1% decline. Food prices remained stable, and energy prices decreased by 0.1%.
The Fed aims for a 2% annual inflation rate. PCE inflation has exceeded this level since March 2021, peaking at approximately 7.2% in June 2022, leading to an aggressive rate-hiking strategy by the Fed.
Following the release, stock markets showed mixed reactions, with the Dow Jones Industrial Average rising by around 100 points, while the S&P 500 and Nasdaq Composite experienced declines. Treasury yields decreased.
Despite the uptick in headline inflation, traders increased their expectations of another rate cut by the Fed in December. The likelihood of a quarter-percentage-point reduction in the central bank’s key borrowing rate stood at 66% on Wednesday morning, according to the CME Group’s FedWatch measure.
While inflation has decreased significantly since the Fed began tightening, it remains a persistent issue for households and has been a significant factor in the presidential race. Consumer spending in October remained robust, although it dipped slightly from September. Current-dollar expenditures increased by 0.4% monthly, in line with forecasts, while personal income surged by 0.6%, surpassing the 0.3% estimate.
The personal saving rate fell to 4.4%, matching its lowest level since January 2023.
Housing-related costs continued to contribute to inflation figures in October, despite expectations of a slowdown as rents stabilized. Housing prices rose by 0.4% during the month.
The Fed utilizes various indicators to assess inflation but specifically relies on the PCE figure for forecasting and policy decisions. This metric is considered broader than the Labor Department’s consumer price index and adjusts for changes in consumer spending patterns.
Officials typically view core inflation as a more reliable long-term indicator but consider both figures when evaluating policy adjustments.
The recent release follows consecutive rate cuts by the Fed in September and November, totaling three quarters of a percentage point. Although the November cut occurred after the period covered by the report, markets had widely anticipated this move.
During their November meeting, Fed officials expressed confidence that inflation was trending towards the 2% target. However, they advocated for a gradual reduction in interest rates, acknowledging uncertainty regarding the extent of necessary cuts.
