Fed’s Key Inflation Measure Likely Stayed Above-Target In October

The Federal Reserve’s preferred measure of inflation likely stayed too hot for comfort in October, though possibly not hot enough to derail the central bank’s expected move to cut interest rates again in December, according to forecasts.

Forecasters expect a Bureau of Economic Analysis report Wednesday to show the cost of living as measured by Personal Consumption Expenditures rose 2.3% in October over 12 months, according to a survey of economists by Dow Jones Newswires and The Wall Street Journal. That would be up from a 2.1% annual increase in September.

If forecasts prove accurate, the uptick would mirror a separate inflation measure, the Consumer Price Index, which also showed inflation rising in October on a year-over-year basis.

“Core” inflation, which excludes volatile prices for food and energy, is expected to have risen 2.8% over the year, accelerating from 2.7% in September. Economists and policymakers closely watch core inflation measures because food and energy prices can fluctuate for reasons unrelated to broader inflation trends.

Stubborn Inflation Complicates Interest Rate Outlook

An uptick would push the inflation rate from the Fed’s 2% annual goal. That could have implications for monetary policy and interest rates since central bankers pay closer attention to PCE than other inflation measures.

The Fed cut interest rates from a two-decade high in September and followed up with another cut in November. However, rates are still high by historical standards, which is keeping borrowing costs elevated on all kinds of credit, including credit cards and auto loans.

The Fed had held interest rates high to suppress the surge of inflation that took hold as the economy recovered from the pandemic in 2022. With inflation having steadily fallen this year, Fed officials grew confident enough that it was under control to start making cuts. The cuts are designed to encourage more borrowing and spending and boost the economy to prevent severe job losses.

But inflation has stayed stubbornly above target, while the job market has stayed resilient, prompting officials, including Fed chair Jerome Powell, to say they are in no hurry to make more cuts.

On Monday, financial market participants were pricing in a 53% chance the Fed would cut its rate by 0.25 percentage points in December, taking it to a range of 4.25% to 4.5%, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

The housing market is a major reason inflation has stayed elevated.

Accelerating housing costs have pushed up the overall inflation rate since shelter is a major factor in the cost of living and dominates most household budgets.

Economists expect to see tamer housing cost increases in future official reports. They predict the government data will begin to reflect a deceleration in home price increases that other measures have documented in recent years.