Key Inflation Measure Lower Than Expected in September

A key inflation measure was lower than expected in September, according to a report from the Commerce Department, which was delayed due to the government shutdown. The core personal consumption expenditures price index, which excludes volatile food and energy prices, indicated a 0.2% monthly rise, while the annual rate was 2.8%. The monthly rate was in line with the Dow Jones consensus, but the annual level was 0.1 percentage point lower. The core annual rate edged down from 2.9% in August.

The Federal Reserve officials use the PCE price index as their primary policy tool for inflation. While officials look at both measures, they generally consider core a better indicator of longer-term inflation trends. “The slightly stale September inflation report shows that prices remained reasonably stable despite tariffs and healthy consumer spending. This probably provides further air cover for the Fed to cut rates in December,” said Scott Helfstein, Global X’s head of investment strategy.

Breakdown of the Report

Goods prices surged 0.5% on the month as President Donald Trump’s tariffs continue to work their way through the economy. Services prices were up just 0.2%. Food rose 0.4% while energy was up 1.7%. The report also showed the personal savings rate was unchanged from August at 4.7%. The release was put off several weeks by the government shutdown, which had caused a halt to all data collection and economic reports.

In addition to the inflation figures, the release provided information on income and spending. Personal income rose 0.4% on the month, while spending was up 0.3%. Income was 0.1 percentage point above the forecast, while spending was 0.1 percentage point below the forecast. Stocks added to gains following the release as traders anticipate a quarter percentage point interest rate cut from the Fed when it announces its rate decision.

Market Reaction and Future Outlook

Odds of a rate cut when the Fed convenes next week held at 87.2% following the report, according to the CME Group’s FedWatch gauge. The interest rate decision will be announced Wednesday. Though the September data is backward-looking, it is the last price reading the Fed will get before its monetary policy meeting next week. However, policymakers have been unusually divided in what the next steps should be for rates.

One FOMC faction supports additional cuts as a way to head off further weakness in the labor market, while another sees continued threats from inflation that would require holding rates in a more restrictive position. Recent labor market indicators show a slow pace of hiring, with some private data points exhibiting an increasing level of layoffs. Labor Department data, though, actually showed a decline last week in initial unemployment benefit claims.

Conclusion and Further Reading

A separate economic report Friday showed consumer sentiment a bit better than expected to start December. The University of Michigan’s consumer survey came in at 53.3, up 4.5% from November and better than the Wall Street estimate for 52. Inflation expectations also dropped, with the one-year view falling to 4.1% and the five-year at 3.2%, both at their lowest levels since January. For more information, you can read the full report Here

Smart Tip for Readers

When monitoring inflation rates and their impact on the economy, it’s essential to consider multiple data points and sources to form a comprehensive understanding of the current market trends and potential future changes. By staying informed and up-to-date on economic reports, you can make more informed decisions about your financial planning and investments.