Inflation rose slightly in October as the Federal Reserve looks for clues about how much to cut interest rates, the Commerce Department said Wednesday.
The Federal Reserve’s broad measure of inflation, the Personal Consumption Expenditure Price Index, rose 0.2% from a month earlier, bringing the 12-month inflation rate to 2.3%. Both were in line with the Dow Jones consensus forecast, but the annualized rate was above September’s 2.1% level.
Excluding food and energy, core inflation showed even stronger growth, rising by 0.3% on a monthly basis and 2.8% on an annual basis. Both met expectations. The annual rate increased by 0.1 percentage points from the previous month.
Services prices drove most of the inflation for the month, rising 0.4%, while goods fell 0.1%. Food prices were little changed, but energy prices fell by 0.1%.
Fed policymakers target inflation at 2% annually. PCE inflation has been above that level since March 2021, reaching about 7.2% in June 2022, prompting the Fed to embark on an aggressive rate hike campaign.
Stock prices were mixed following the announcement, with both the S&P 500 and Nasdaq Composite indexes negative, but the Dow Jones Industrial Average rising about 100 points. Government bond yields have fallen.
Despite the rise in headline inflation, traders increasingly expected the Fed to approve another rate cut in December. There was a 66% chance the central bank’s key borrowing rate would be cut by a quarter of a percentage point as of Wednesday morning, according to CME Group FedWatch indicators.
Inflation has fallen significantly since the Fed began tightening, but it remains a thorny issue for households and featured prominently in the presidential campaign. Despite the slowdown in inflation over the past two years, the cumulative impact of inflation has hit consumers particularly hard at the lower end of the wage scale.
Although consumer spending slowed slightly from September, it remained strong in October. According to the report, spending for the month rose by 0.4% compared to the same month, as expected, and personal income rose by 0.6%, significantly higher than the forecast of 0.3%.
The personal savings rate fell to 4.4%, the lowest level since January 2023.
On the inflation front, housing-related costs continue to push up the numbers, despite expectations that the pace will slow due to rent relief. House prices rose 0.4% in October.
The Fed follows a dashboard of a wide range of indicators to measure inflation, but specifically uses PCE numbers as a forecasting and key policy tool. This data is considered broader than the Labor Department’s Consumer Price Index, which adjusts for consumer spending behavior such as exchanging expensive goods for cheaper ones.
Officials tend to think core inflation is a better long-term indicator, but they use both numbers when considering policy moves.
The announcement comes after the Fed cut rates by a total of three-quarters of a percentage point in September and November. Although November’s rate cut came later than the month covered by the report, the move was widely anticipated by the market.
Fed officials expressed confidence at their November meeting that inflation was on track to reach their 2% target, but members acknowledged uncertainty about how much rate cuts would be needed and said advocated a reduction in interest rates.
