Inflationary Pressure Mounts as PCE Indices Exceed Federal Reserve’s Target

The Federal Reserve’s Core Personal Consumption Expenditures (PCE) Deflator for September fell to a four-month low of 3.7% year-on-year (YoY), while the Headline PCE held steady at 3.4%. Despite this YoY decline, the Core PCE recorded its largest month-on-month (MoM) increase of 0.3% in the past four months, according to data released on Friday.

At the same time, inflation within services, excluding housing and energy, as well as services inflation excluding shelter, accelerated to 0.4%. The overall PCE price index rose by 0.4%, driven by increasing energy costs.

Personal Consumption grew by 0.7% MoM, significantly outpacing the 0.3% increase in income during the same period. Private sector wages dropped to a low of 3.9% since February, while government wages surged to almost record YoY levels of 7.8%, just shy of the October record of 8.7%. This wage gap led to a decline in the personal savings rate from 4% to 3.4% of Disposable Personal Income (DPI), marking the fourth consecutive month of decline, a trend influenced by “Bidenomics.”

The Bureau of Economic Analysis (BEA) reported that September’s PCE and Core PCE indices were at 3.4% and 3.7%, respectively, with the Consumer Price Index (CPI) slightly higher at 3.7%. The PCE increased by 0.4% month-on-month, keeping inflation above the Federal Reserve’s target.

Federal Reserve Chair Jerome Powell, during a speech at the Economic Club of New York on Friday, indicated a potential halt to rate hikes but left the door open for further increases depending on the balance of risks and new data.

Meanwhile, the Cleveland Fed’s Inflation Nowcasting suggests that October’s PCE may drop to an annual rate of 3.2%. The Federal Open Market Committee (FOMC) is expected to keep the benchmark federal funds rate within the range of 5.25% to 5.50%.

Despite a strong Q3 GDP growth of 4.9%, driven by robust consumer and government spending along with unemployment rates remaining below 4%, the Fed estimates that inflation will not reach its 2% target until 2026.