Crucial inflation report showed few signs of improvement last month

By Elisabeth Buchwald, CNN

New York (CNN) — The Federal Reserve’s preferred inflation gauge cooled slightly last month, according to data released Friday by the Commerce Department.

Excluding gas and food prices, the core Personal Consumption Expenditures index rose 3.7% for the 12 months ended in September, down from the 3.8% rate seen in August. That represents the smallest year-over-year increase since the 3.2% annual rate seen in May 2021. On a monthly basis it rose 0.3% from the 0.1% rate seen in August.

On a monthly basis, the overall index was unchanged, at the same 0.4% rate seen in August. For the 12 months that ended in September, the index was also unchanged, at 3.4%.

Economists estimated that the headline PCE index would rise 0.3% monthly and 3.4% annually, according to Refinitiv.

Within the goods category, price increases for prescription drugs and cars were the biggest contributors to the overall increase last month, according to the Commerce Department. Within services, the largest contributors were international travel and housing.

The new inflation data comes on the heels of Thursday’s third-quarter gross domestic product report that estimated the US economy expanded at an annual rate of nearly 5%. That’s more than double the growth rate the economy experienced last quarter.

It’s one of the last new major pieces of data the Fed will have to evaluate at its upcoming monetary policy meeting, which begins on Tuesday.

“It does appear that inflation is coming down while growth remains robust — contrary to what many had predicted,” Lael Brainard, director of the National Economic Council, said Friday morning at an event hosted by the Peterson Institute for International Economics.

Consumers ramp up spending, using up more of their savings

The Commerce Department’s latest Personal Income and Outlays report also showed that consumers spent more money in September, rising 0.7% from the 0.4% increase in August. Higher spending levels were also evident in the GDP report, which found consumer spending increased by an annualized rate of 4%, the strongest pace since the fourth quarter of 2021.

At the same time, however, incomes grew at a slower pace last month, at 0.3% from 0.4% in August. That meant more consumers had to dip into their savings — as evidenced by the personal saving rate, which is savings as a percentage of disposable income. That rate declined sharply last month to 3.4% from an upwardly revised 4% in August. This marked the lowest level since December 2022 and the fourth consecutive month of declines in the personal saving rate.

Bill Adams, chief economist at Comerica Bank, said this data is a reflection of “reduced government spending on social services, rising interest expense, and higher tax rates.”

“As a result, consumer spending is likely to grow more slowly near-term,” he said, adding that it will likely contribute to slower GDP growth in the final quarter of this year.

Friday’s report is unlikely to convince Fed officials that they should raise interest rates next week. The central bank is widely expected to hold interest rates steady for the second meeting in a row. But there is less of a consensus on what Fed officials will do at the December and January meetings, according to the CME FedWatch Tool.

“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 for LPL Financial.

Correction: An earlier version of this story included preliminary PCE data for August. It was revised in the September report released Friday.

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