Rate watched by Fed hit 2.8%

The recent report from the Commerce Department revealed that the core personal consumption expenditures price index, a key inflation measure, was lower than expected in September. This data, which was delayed due to the government shutdown, showed a 0.2% monthly increase and a 2.8% annual rate. While the monthly rate aligned with expectations, the annual rate was slightly lower than anticipated.

The Federal Reserve closely monitors the PCE price index as a primary tool for assessing inflation. The core PCE, which excludes volatile food and energy prices, is considered a more reliable indicator of long-term inflation trends. With the September report indicating stable prices despite tariffs and strong consumer spending, it may give the Fed further reason to consider lowering interest rates in December.

Goods prices surged by 0.5% due to the impact of President Trump’s tariffs, while services prices only rose by 0.2%. Food prices increased by 0.4% and energy prices by 1.7%. The report also revealed that the personal savings rate remained unchanged at 4.7%.

In addition to inflation data, the report included information on income and spending. Personal income rose by 0.4% in September, slightly exceeding forecasts, while spending increased by 0.3%, falling slightly below expectations. Following the release of the report, stocks saw gains as traders anticipated a quarter percentage point interest rate cut from the Fed.

The likelihood of a rate cut at the upcoming Fed meeting remained high, with the CME Group’s FedWatch gauge indicating an 87.2% probability. The decision on interest rates will be announced next week. Despite the backward-looking nature of the September data, it is the final price reading the Fed will consider before its monetary policy meeting.

However, there is division among policymakers regarding the next steps for interest rates. Some members of the FOMC support further rate cuts to address labor market weaknesses, while others are concerned about inflationary pressures that may require a more restrictive monetary policy. Recent labor market indicators have shown a slow pace of hiring, with some signs of increasing layoffs.

Another economic report released on Friday showed consumer sentiment slightly improved at the start of December. The University of Michigan’s consumer survey indicated a reading of 53.3, up 4.5% from November and surpassing Wall Street estimates. Inflation expectations also decreased, with the one-year outlook falling to 4.1% and the five-year outlook at 3.2%, reaching their lowest levels since January.

Overall, the September inflation data, along with other economic indicators, will play a crucial role in shaping the Fed’s decision on interest rates in the upcoming meeting.