Inflation has increased to 2.3% annually, hitting the Federal Reserve’s preferred target as reported by the Commerce Department on Wednesday. The personal consumption expenditures price index, which is the Fed’s preferred measure of inflation, rose by 0.2% in October, resulting in a 12-month inflation rate of 2.3%. This aligns with the Dow Jones consensus forecast, although it is slightly higher than September’s rate of 2.1%.
When excluding food and energy prices, core inflation showed even stronger readings, with a 0.3% increase on a monthly basis and an annual rate of 2.8%. Both of these figures met expectations, with the annual rate being 0.1 percentage point higher than the previous month. Services prices were the main contributors to inflation, rising by 0.4%, while goods saw a decrease of 0.1%. Food prices remained relatively stable, while energy prices dropped by 0.1%.
The Federal Reserve aims to keep inflation at a steady 2% annual rate. The PCE inflation rate has been above this level since March 2021, peaking at around 7.2% in June 2022. This prompted the Fed to embark on an aggressive rate-hiking campaign in response to the high inflation rates.
Following the release of the inflation data, stock markets showed mixed reactions, with the Dow Jones Industrial Average increasing by approximately 100 points, while the S&P 500 and Nasdaq Composite experienced declines. Treasury yields also fell in response to the news.
Despite the rise in headline inflation, traders are betting on the Fed approving another rate cut in December. The odds of a quarter-percentage-point reduction in the central bank’s key borrowing rate were at 66% on Wednesday morning, according to the CME Group’s FedWatch measure.
Inflation remains a concern for households and has been a prominent issue in the presidential race. While the inflation rate has decreased over the past two years, the cumulative effects of inflation continue to impact consumers, especially those with lower incomes. Consumer spending in October remained solid, although it slightly decreased from September. Current-dollar expenditures rose by 0.4%, while personal income saw a significant jump of 0.6%, exceeding the estimated 0.3%.
Housing-related costs have been a significant factor in boosting inflation numbers, despite expectations of a cooling pace as rents stabilize. Housing prices rose by 0.4% in October. The Federal Reserve closely monitors a variety of indicators to assess inflation but relies on the PCE figure for forecasting and as a primary policy tool. This data is considered more comprehensive than the consumer price index and adjusts for changes in consumer spending habits.
Following consecutive rate cuts in September and November totaling three quarters of a percentage point, the Federal Reserve remains cautiously optimistic about inflation moving towards the 2% target. However, there is uncertainty among members about the extent of future rate cuts needed, leading to a gradual approach to interest rate reductions.
