Inflation rises slightly in October, aligning with expectations, as the Federal Reserve continues to evaluate how much it should reduce interest rates. According to a report released by the Commerce Department on Wednesday, the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, increased by 0.2% on a monthly basis and reached an annual inflation rate of 2.3%. Both figures matched analysts’ forecasts, though the annual rate showed an uptick from September’s 2.1%.
Core Inflation Records a Higher Increase
When food and energy costs were excluded, core inflation saw a stronger rise. Core inflation increased by 0.3% for the month, resulting in an annual rate of 2.8%. These numbers also aligned with projections, but the annual figure represented a 0.1 percentage point increase from the prior month.
Inflation in October was largely driven by higher service prices, which rose by 0.4%. In contrast, the cost of goods declined by 0.1%, while food prices remained relatively unchanged, and energy prices fell by 0.1%.
Fed’s Inflation Target Remains Above the 2% Mark
Inflation rises above the Federal Reserve’s 2% annual target, but the PCE inflation rate has remained above that level since March 2021. Inflation peaked at 7.2% in June 2022, prompting the Fed to launch an aggressive series of interest rate hikes.
Despite the latest data, the Federal Reserve appears cautiously optimistic. Inflation has slowed significantly since the peak, but it remains a persistent issue for households, particularly lower-income consumers. Inflation’s cumulative impact over the past two years has become a critical factor in economic discussions and the ongoing presidential race.
Market Reactions and Rate Cut Speculations
Inflation rises slightly, and the financial markets showed mixed reactions following the report. The Dow Jones Industrial Average gained around 100 points, while the S&P 500 and Nasdaq Composite both recorded declines. Treasury yields fell in response to the inflation data.
Traders have increasingly bet on another rate cut by the Federal Reserve in December. As of Wednesday morning, the odds of a 0.25% reduction in the central bank’s borrowing rate stood at 66%, based on CME Group’s FedWatch measure.
Consumer Spending and Income Trends
Despite inflationary pressures, consumer spending remained steady in October, though it slowed slightly compared to September. Current-dollar expenditures rose by 0.4% for the month, meeting expectations, while personal income saw a notable increase of 0.6%, surpassing the 0.3% forecast.
The personal saving rate, however, slipped to 4.4%, its lowest level since January 2023.
Housing Costs Continue to Drive Inflation
Inflation rises in part due to housing-related costs, which were a significant contributor to the overall increase in October. Housing prices rose by 0.4% during the month, defying expectations of a cooling trend as rents begin to ease.
The Federal Reserve monitors a range of economic indicators to assess inflation, but it relies on the PCE index as its primary forecasting tool. This metric is considered broader than the Consumer Price Index (CPI) because it accounts for changes in consumer spending habits, such as substituting higher-cost goods with more affordable options.
While officials view core inflation as a better long-term gauge of price stability, both headline and core figures are factored into monetary policy decisions.
Fed’s Strategy on Interest Rate Reductions
The report comes after consecutive interest rate cuts by the Federal Reserve in September and November, totaling 0.75%. Although the most recent reduction occurred after the period covered by the report, markets widely anticipated the move.
During the November meeting, Fed officials expressed confidence that inflation is steadily moving toward the 2% target. However, policymakers emphasized a cautious approach, advocating for gradual interest rate reductions to account for uncertainties about how much further cuts may be required.
As inflation rises, the latest data will likely play a significant role in shaping the Federal Reserve’s monetary policy in the coming months.
