By The Federal Reserve’s preferred inflation gauge is expected to reveal a continued slowdown in price growth during September. This is seen as a positive trend for Fed officials as they approach the Nov. 1 interest-rate decision.
Core PCE Price Index
The core personal-consumption expenditures (PCE) price index, which excludes the more volatile food and energy costs, is closely monitored by the Fed. Economists surveyed by FactSet predict that this indicator will show a 3.7% year-over-year decrease in inflation for September, down from the 3.9% rate recorded in August.
However, on a monthly basis, there is an expected pickup in core PCE growth. Economists forecast that the core PCE index will climb 0.3% in September, up from August’s rate of 0.1%.
Headline PCE Index Measure
The headline PCE index measure, which includes food and energy prices that are stripped out of the core measure, is also expected to decelerate. FactSet reports a forecast of a 3.4% year-over-year pace for September, compared to the 3.5% rate in August. Consensus estimates suggest a month-over-month increase of 0.3% in September, following a pace of 0.4% in August.
Although there is an expectation that Friday’s PCE data will continue to show progress in controlling inflation, there is always the possibility of surprises. Recent economic data for September, such as the Consumer Price Index, indicated higher-than-expected figures. The headline CPI revealed a 3.7% year-over-year increase in consumer prices, surpassing consensus expectations by 0.1 percentage point.
Third-Quarter GDP and Core PCE Index
Thursday’s first estimate of third-quarter real gross domestic product (GDP) revealed significant strength, indicating a growth of 4.9% from July to September. However, experts believe this growth may be short-lived.
According to the GDP report by the Bureau of Economic Analysis, the core PCE index rose by 2.4% in the third quarter, slowing down from the 3.7% rate recorded in the second quarter. This marks the slowest quarterly pace of core inflation since the fourth quarter of 2020.
Mike Reynolds, Vice President of Investment Strategy at Glenmede, commented that “the inflation genie is not yet back in the bottle.” He believes that inflation still has some way to go before normalizing near acceptable longer-term levels.
The Fed Expected to Hold Interest Rates Steady Despite Inflation Pressure
The upcoming Personal Consumption Expenditures (PCE) report, set to be published on Friday, is unlikely to bring any surprises, with economists predicting that the Federal Reserve will maintain the benchmark interest rate within the current range of 5.25% to 5.5%. Even though inflation remains above the Fed’s 2% target, the central bank seems cautious about raising rates further given the recent tightening of financial conditions.
Chief Economist Ellen Zentner and her team at Morgan Stanley believe that the current rate range will mark the peak of this tightening cycle, as they anticipate the Fed to acknowledge the recent strength in economic activity but also soften their stance on the need for additional tightening.
Federal Reserve Chair Jerome Powell’s recent speech at the Economic Club of New York set the tone for this approach. In his address, Powell recognized the risks to the economic outlook but displayed little enthusiasm for aggressive rate hikes in the near future. The committee is proceeding carefully, considering all the incoming data, evolving outlook, and balance of risks before making decisions on further policy firming and the duration of policy restrictiveness.
Despite the Fed’s aggressive monetary tightening, the latest robust economic data suggests that the US economy has remained solid in the second half of 2023, according to PNC Chief Economist Gus Faucher. Faucher believes that the central bank is likely satisfied with leaving interest rates unchanged. However, he cautions that a potential spike in inflation caused by higher energy prices or a strong labor market could still lead to further rate hikes, posing an additional headwind to growth.
The Bureau of Economic Analysis is scheduled to release the September PCE price index on Friday at 8:30 a.m. ET.
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