The Fed's Favorite Measure Of Inflation Is Nearing A Magic Number

Key Takeaways

• Economists expect inflation, as measured by Personal Consumption Expenditures, to fall to a 2.1% annual rate in September, closing in on the Federal Reserve's goal of 2% annual inflation.
• If predictions hold up, the year-over-year inflation rate will simmer down to its lowest since March 2021.
• Fed officials are unlikely to break out the champagne if PCE inflation hits 2% because they mainly watch core inflation, which excludes volatile prices for food and energy and which is farther away from the 2% goal.

Inflation could be on the verge of falling to a 2% annual rate, consistent with the Federal Reserve's definition of stable price increases. However, reaching that milestone would come with an asterisk.

A report on inflation and consumer spending due Thursday from the Bureau of Economic Analysis is expected to show that the cost of living rose 2.1% over 12 months in September, according to surveys of forecasters by Dow Jones Newswires and The Wall Street Journal. The measure, called the Personal Consumption Expenditures Price Index, is down from 2.2% annual inflation in August and the lowest in more than three years.

The upcoming report could be a significant milestone for economists evaluating inflation data because the Fed aims for a rate of 2% annual price increases when it sets the nation's monetary policy.

There's a Catch When It Comes To PCE

However, the Fed evaluates inflation mainly using core PCE, which, unlike the overall PCE figure, excludes volatile prices for food and energy. Economists and Fed officials use core inflation to judge overall inflation trends because food and gas prices can swing up and down from month to month for reasons that have little to do with the overall trajectory of the economy.

Core PCE rose 2.7% in August, and the median forecast calls for it to fall to 2.6%, so it's still running well above the Fed's goal of a 2% annual rate. Still, it's well below its recent peak of 5.6% reached in February 2022.

Falling gas prices have helped push down overall inflation, while core inflation has stayed stubbornly high largely because prices for shelter have run hotter than expected.

Thursday's report may show some setbacks in the short-term inflation trend, even as the year-over-year figures improve. Overall inflation is expected to have risen 0.2% in September from August, compared to a 0.1% monthly increase the previous month. The median forecast for monthly core inflation calls for a 0.3% rise, up from 0.1% in August, mirroring an uptick in the Consumer Price Index, a separate inflation report from the Bureau of Labor Statistics released earlier this month.

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