Key Fed inflation gauge rose 0.3% as expected in September; spending tops estimate

Inflation accelerated in September but consumer spending was even stronger than expected, according to a Commerce Department report Friday.

The core personal consumption expenditures price index, which the Federal Reserve uses as a key measure of inflation, increased 0.3% for the month, in line with the Dow Jones estimate and above the 0.1% level for August.

Even with the pickup in prices, personal spending kept up and then some, rising 0.7%, which was better than the 0.5% forecast. Personal income rose 0.3%, one-tenth of a percentage point below the estimate.

Including volatile food and energy prices, the PCE index increased 0.4%. On a year-over-year basis, core PCE increased 3.7%, one-tenth lower than August, while headline PCE was up 3.4%, the same as the prior month.

The Fed focuses more on core inflation on the belief that it provides a better snapshot of where prices are headed over the longer term. Core PCE peaked around 5.6% in early 2022 and has been on a mostly downward trek since then, though it is still well above the Fed’s 2% annual target. The Fed prefers PCE as its inflation measure as it takes into account changing consumer behavior such as substituting lower-priced goods as prices increase.

Markets mostly shrugged off the report, with stock market futures pointing slightly higher and Treasury yields mixed across the curve.

“Although consumer prices rose faster than expected from a month ago, core inflation continues to lose speed and this report will not likely change the Fed’s view that inflation will slow in the coming months as demand slows,” said Jeffrey Roach, chief economist at LPL Financial. “Eventually, spending will moderate after several months of consumers spending more than they earn.”

This is the last inflation report the Fed will see before its two-day policy meeting next week. Traders are pricing in a near-100% chance that the central bank will announce no rate hike when the meeting concludes Wednesday, according to the CME Group.

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