Inflation falls to lowest level since 2021 in Fed’s preferred gauge

Price increases have fallen to their lowest level in more than three years in the latest reading of the Federal Reserve’s preferred inflation gauge, strengthening the outlook for more interest rate cuts to come.

The personal consumption expenditures (PCE) price index slid to a 2.1-percent annual increase in September, down from 2.3 percent in August and 2.5 percent in July, according to the Commerce Department.

Prices for goods decreased 1.2 percent on the month and prices for energy decreased 8.1 percent. The national average price for a gallon of gasoline is down to $3.13, according to auto service provider AAA. A year ago, it was $3.47.

"While critics said we needed a recession to lower inflation, instead inflation has come down while our economy has grown more than 12% over the course of my Administration—the fastest rate of any presidential term in the 21^st century," President Biden said in a statement.

Removing the more volatile categories of energy and food, the PCE advanced 2.7 percent annually, the same increase since August and July. On a monthly basis, the core PCE increased by 0.3 percent, an acceleration from the 0.2-percent increases in the three previous months, which may be of some concern to the Fed.

Personal consumption continued to show strength, increasing by 0.5 percent in September from 0.3 percent in August. Personal incomes increase 0.3 percent, up from 0.2 percent in the previous month.

“The bottom line is that the labor market remains strong, inflation is broadly disinflationary with some bumps along the road, and economic growth is solid. Ordinarily the Fed should be unfurling the mission accomplished banner, but potential policy uncertainties in 2025 will curb their enthusiasm,” Olu Sonola, head of US economic research at Fitch Ratings said in a statement sent to The Hill.

Despite the outsized contraction in energy and a bit of stickiness in the core, market participants see a clear path forward for the Fed to continue with interest rate cuts.

“We think they will likely cut rates 25 basis points twice through the end of the year and will guide towards a terminal rate of 3.0 percent to 3.5 percent,” Scott Helfstein, head of investment strategy at Global X, said in a commentary.

“Personal spending came in a little faster than expected, which was also reflected in third quarter GDP. With $1 trillion in personal savings and a 4.6-percent savings rate, there is likely plenty of fuel left for the consumer to keep going,” he added. “The Fed should be mindful of the labor market at this point, but this looks like a soft or rather no landing.”