U.S. consumer inflation got closer to the Federal Reserve’s 2% target in September 2024 when year-on-year total Personal Consumption Expenditures inflation fell to 2.1%. Although year-on-year total PCE inflation slowed in September, year-on-year core PCE inflation remained unchanged at 2.7% for a third consecutive month. Inflation rates are likely to ease further, clearing the way for lower interest rates.
Mixed Inflationary Pressures in September
Important inflationary data was released this week in the Personal Income and Outlays report from the Bureau of Economic Analysis. Month-on-month pressures were modest, as the September 2024 PCE price index increased by 0.2%, and the core PCE price index, which excludes food and energy, increased by 0.3%.
While month-on-month PCE prices rose modestly, year-on-year inflation pressures were mixed in September.
On the upside, year-on-year total PCE inflation slowed from 2.2% to 2.1%, which was the slowest year-on-year inflation rate since February 2021.
On the downside, year-on-year core PCE inflation remained unchanged at 2.7% for a third consecutive month. Although total PCE inflation has made progress toward the Fed’s 2% target, core PCE inflation still needs to fall further.
The somewhat mixed PCE report follows similarly mixed signals in the September CPI report. Year-on-year total CPI inflation slowed in September from 2.5% to 2.4%, which was also the lowest year-on-year pace since February 2021. On the downside, year-on-year core CPI was high and accelerated to 3.3% from 3.2%.
Fed Policy Implications
Easing inflation is critical for the future of Fed policy and interest rates.
The September projections of the Federal Open Market Committee reflect expectations that the Fed is likely to cut interest rates through the end of 2026. The FOMC median forecasts reflected expectations that interest rates would be 4.4% by the end of 2024, 3.4% by the end of 2025, and 2.9% by the end of 2026.
The September FOMC projections also reflected expectations that PCE and core PCE inflation would also fall on trend through the end of 2026. PCE inflation for the fourth quarter of 2024 is expected to be 2.3%, and core PCE inflation is expected to be 2.6% for the fourth quarter of 2024.
Based on the September PCE figures released this week, headline PCE is making significant progress toward these forecasts and the Fed’s 2% target, although core PCE is still sticky. Modestly easing PCE inflationary pressures should give the Fed the license to cut interest rates gradually while also hindering the Fed from cutting rates significantly or swiftly.
What do you think about the latest PCE inflation report?
Will PCE inflation rates fall enough to justify future Fed interest rate cuts?
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