Federal Reserve’s Preferred Inflation Metric Ticks Up as Services Fuel Price Pressures

The Federal Reserve’s preferred inflation measure—the personal consumption expenditure (PCE) price index—edged up in October as services continued to fuel price pressures.

According to the Bureau of Economic Analysis (BEA), annual PCE price index inflation rose to 2.3 percent last month from 2.1 percent in September. The index jumped by 0.2 percent monthly and aligned with the consensus forecast.

Core PCE inflation, which omits the volatile energy and food categories, ticked up to 2.8 percent, up from 2.7 percent. This, too, was in line with market estimates. Core PCE increased by 0.3 percent from September to October.

Prices for goods tumbled by 0.1 percent, and prices for services surged by 0.4 percent. From the same time a year ago, costs for goods declined by 1 percent, and prices for services advanced by 3.9 percent.

Food and energy prices were flat last month.

Services remain a challenge for the Fed as a broad array of categories tick higher or remain elevated, such as transportation, medical, and shelter.

Fed policymakers value the PCE more than the consumer price index (CPI) because the former maintains a broader scope of expenditures and uses more accurate weighting. By relying on a more comprehensive metric, the Fed can more accurately guide its mandate of price stability.

The PCE report further revealed that personal income advanced at a higher-than-expected pace of 0.6 percent, up from 0.3 percent in September. Personal spending also swelled at a higher-than-expected rate of 0.4 percent, down from 0.6 percent.

The next major inflation reading will be the November CPI report later next month.

According to the Cleveland Fed’s Inflation Nowcasting model, CPI and core CPI inflation are expected to come in at 2.7 percent and 3.3 percent, respectively.

Additionally, November PCE and core PCE inflation readings are anticipated to clock in at 2.5 percent and 2.9 percent, respectively.

Market Reaction

Financial markets little changed midweek, with the leading benchmark indexes seesawing before positive and negative territory.

U.S. Treasury yields were in a sea of red ink as the benchmark 10-year yield fell below 4.26 percent.

The U.S. dollar index, a gauge of the buck against a basket of currencies, plunged below 107.00. But the index is poised for a November gain of more than 2 percent.

The futures market widely believes the Fed will follow through on a quarter-point interest rate cut at next month’s meeting, representing the third consecutive reduction to the benchmark federal funds rate.

“As long as we don’t get some ugly inflation readings going forward, it should be likely they begin to cut rates,” Ken Mahoney, CEO of Mahoney Asset Management, said in a note emailed to The Epoch Times.

The consensus among market watchers is that inflation is on the decline. The Fed’s September Summary of Economic Projections, for example, indicated that the median inflation rate will be 2.1 percent in 2025 and 2 percent in 2026.

But inflation’s trajectory is emulating the last major inflation episode from the 1970s and 1980s, says Torsten Slok, chief economist at Apollo Global Management.

“Combined with the observed acceleration in average hourly earnings in recent months, the risks are rising that inflation could begin to move higher again,” Slok said in a note to The Epoch Times.

Nancy Tengler, CEO and chief investment officer at Laffer Tengler Investments, is also concerned that inflation could be stickier than believed.

READ MORE