Economic News

October’s Fed Preferred Inflation Gauge Slowed



The Fed’s preferred inflation gauge is showing signs of easing, yet price increases remain too rapid for comfort.

In October, inflation showed hints of dropping but remained persistently high, as a slew of economic data emphasized that a return to normal price hikes could take some time.

The Personal Consumption Expenditures index, which the Federal Reserve constantly monitors, rose by 6% year on year through October, according to the data, which was in line with what economists polled by Bloomberg projected. This was a decrease from a 6.3 percent growth in the year to September.

A core price gauge that excludes food and fuel expenses, which the Fed frequently monitors for clues about future inflation, fell slightly to 5%. It has been hanging around that level for the whole year, so while the current reduction is encouraging, it is far from decisive.

Other economic figures supplied new evidence of the economy’s ongoing strength. Consumer spending was increasing, wages were rising, and jobless claims were low, according to figures released on Thursday, indicating that the economy remains resilient as employees benefit from ample job opportunities and use their savings to continue purchasing. Sustained demand and a strong labor market may assist to avoid a sharp recession, but they may also encourage businesses to keep raising prices, extending the path back to normal inflation.

The Fed is closely monitoring inflation as it determines how high to raise interest rates and how long to keep them there. Central bankers have increased borrowing prices to about 4% this year, up from near-zero in March, in a quick series of three-quarter point increases. The Fed’s chairman, Jerome H. Powell, suggested on Wednesday that policymakers are planning to delay rate hikes in December. The question today is when and how much longer they will raise borrowing costs.

Mr. Powell signaled that rates would likely need to rise slightly higher than the 4.6 percent peak predicted by officials in September when they issued their most recent economic estimates. Based on market pricing, investors now expect rates to peak between 4.75 percent and 5% before falling somewhat late in 2023.


Mr. Powell stated this week that “ongoing increases will be acceptable. We have a long way to go before we can restore price stability.”

Thursday’s inflation figures follow a more recent Consumer Price Index report, which showed that price hikes began to slow in October. The C.P.I. figures are closely monitored because they are released more frequently and feed into the Personal Consumption Expenditures data. However, the Fed’s official inflation target is based on PCE numbers.

Central bankers aim for 2% annual inflation on average and over time, thus the present rate is still far quicker than their target. Given that so-called core inflation has been stable at roughly 5% this year, the Fed has been unwilling to make much of the recent drop in overall prices.

“Over 2022, core inflation soared a few tenths over 5 percent and fell a few tenths below, but it generally drifted sideways,” Mr. Powell said this week, stressing that to return inflation to normal, demand must remain sluggish, goods inflation must continue to ease, and the labor market must rebalance.

Many economists believe that inflation will begin to reduce in 2023 as market-based rent prices begin to drop, supply chain issues ease, and consumers shift their spending away from things and toward services, which should help prices for physical products such as couches and apparel moderate.

After adjusting for food and fuel prices, Goldman Sachs economists predicted in mid-November that inflation will reduce to below 3% by the end of 2023. However, at this time last year, they predicted that core inflation would fall to 2.3 percent by the end of 2022.

“For more than a year, predictions have predicted just such a drop, yet inflation has gone stubbornly sideways,” Mr. Powell said this week, adding later that “we’re going to have to be humble and suspicious about forecasts for some time.”

It is difficult to forecast what will happen next with inflation, in part because the economy, which had slowed significantly this year, appears to be robust, if not re-accelerating, in the face of increased prices and interest rates.


According to Thursday’s figures, consumption increased by 0.8 percent in October compared to the previous month, up from a 0.6 percent increase the previous month. Spending increased by 0.5 percent when adjusted for inflation.

Anecdotal evidence suggests that the holiday shopping season is off to a strong start: According to Mastercard data, retail sales over the Thanksgiving weekend were up 10.9 percent over the previous year, excluding autos and not adjusted for inflation.

Americans are bolstered in part by a healthy labor market, which allows them to take home more money, as well as one-time gifts from states, some of which still have stimulus money to distribute or are benefiting from high tax receipts.

Personal income increased by 0.7 percent in October, and by 0.4 percent after correcting for inflation, according to figures released on Thursday. That was the largest inflation-adjusted gain since July.

Personal income includes government social benefits, which boosted it last month, “mainly reflecting one-time refundable tax credits granted by states,” according to the Bureau of Economic Analysis.

Simultaneously, people appear to be becoming more price sensitive as their savings run out and high-priced food and petrol strain family finances. Stores have begun to lower products again in order to attract and retain customers, which, if severe enough, could assist to cut inflation.

Consumers may become even more sensitive next year if the Fed’s policy decisions in 2022 affect the economy and dampen corporate expansions, hiring, and pay increases, as many economists predict, and as households draw down their savings stocks accumulated during the pandemic.

“We expect spending growth to decline, owing to a significant increase in the pace of layoffs and a slowdown in hiring,” Pantheon Macroeconomics‘ Ian Shepherdson wrote in a research note. “In the face of a weakening labor market, we believe people will be less eager to deplete their savings.”


Fed officials are keeping an eye on both expenditure data and the labor market as they try to predict what will happen with inflation next. Wage growth has been robust in recent months, and it may be difficult for inflation to return to normal without slower wage growth.

This is because service pricing, such as haircuts, manicures, and vacations, are significantly influenced by pay increases. When businesses spend more on labor, they are more likely to pass those expenses on to customers in the form of increased pricing.

On Friday, the Labor Department will issue November employment figures, giving Americans a fresh look at how the job market and wage situation are shaping up.

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