The Federal Reserve’s preferred inflation gauge is expected to show that price growth continued to cool in September, a positive trend for Fed officials heading into the Nov. 1 interest-rate decision.
The core personal-consumption expenditures price index—a closely watched indicator by the Fed that excludes the more volatile food and energy cost—is expected to show the pace of inflation in September fell 3.7% year over year, down from the 3.9% rate recorded in August, according to economists surveyed by FactSet.
Yet on a monthly basis, core PCE growth is expected to pick up the pace. Economists predict the core PCE index climbed 0.3% in September, up from August’s 0.1% rate.
Last month’s headline PCE index measure—which includes food and energy prices that the core measure strips out—is also forecast to decelerate to a 3.4% pace year over year, compared with the 3.5% rate recorded in August, according to FactSet. The consensus is that month-over month, inflation rose 0.3% in September, from 0.4% pace in August.
But while the expectation is that Friday’s PCE data will show continued progress on taming inflation, there is always the possibility of a surprise. Much of September’s other economic data, including the Consumer Price Index, came in hotter than expected. The headline CPI showed consumer prices in September climbed 3.7% year over year, coming in 0.1 percentage point above consensus expectations.
Thursday’s first estimate of third-quarter real gross domestic product (GDP) also revealed remarkable strength. The initial estimate showed the U.S. economy grew 4.9% from July to September. But while the economy seemed to accelerate over the summer, much of that strength is expected to be short-lived.
The Bureau of Economic Analysis also revealed in Thursday’s GDP report that core PCE index rose 2.4% in the third quarter, slowing from the 3.7% rate recorded in the second quarter. That’s the slowest quarterly pace of core inflation since the fourth quarter of 2020.
“The inflation genie is not yet back in the bottle,” as Mike Reynolds, vice president of investment strategy at Glenmede put it. “It’s one piece of a mosaic of data that suggests inflation still has some ways to go before normalizing near acceptable longer-term levels.”
Friday’s PCE report is likely to indicate more of the same. Yet despite inflation remaining above the Fed’s 2% target, many economists expect Fed officials to hold the benchmark interest rate steady at the current range of 5.25% to 5.5%. The CME FedWatch Tool, which tracks interest-rate futures, on Thursday showed the odds of the Fed holding rates steady at next week’s policy meeting at 98.6%.
“We expect the Fed to recognize recent strength in economic activity but, with tightening financial conditions, to soften guidance about the need for additional tightening,” Chief Economist Ellen Zentner and her team at Morgan Stanley wrote Thursday. The team expects the current rate range will be the peak of this tightening cycle.
Fed Chair Jerome Powell’s speech at the Economic Club of New York last week set the tone, Zentner wrote. She noted that the head of the central bank acknowledged the risks to the outlook, but showed little appetite for more rate hikes in the near-term.
“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said last week. “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
Despite the central bank’s aggressive monetary tightening, the recent spate of stronger economic data reflects that the U.S. economy remains very solid in the second half of 2023, PNC Chief Economist Gus Faucher wrote Thursday.
“The central bank is likely content to leave interest rates where they are,” Faucher noted. “But a pickup in inflation from higher energy prices or the strong labor market could lead to further rate hikes and an additional headwind to growth.”
The Bureau of Economic Analysis will publish the September PCE price index on Friday at 8:30 a.m. ET.
Write to Megan Leonhardt at [email protected]
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