Inflation data released this week suggests that the Federal Reserve is making progress towards its goal of 2% inflation. Both consumer and producer price indexes for September were in line with expectations, showing a slowing rate of inflation. If projections are correct, the Commerce Department’s personal consumption expenditures price index for September will show a 12-month inflation rate of 2.04%, close to the Fed’s target. The Fed closely monitors the PCE index as a gauge of inflation trends. While the job market has cooled to around full employment levels, the Fed aims to maintain both inflation and employment at their current levels.
Despite the positive data, keeping inflation under control remains a challenging task. While prices are not increasing at the troubling rates seen in recent years, there are still obstacles ahead. The 12-month rate for the all-items consumer price index was 2.4% in September, and the annual rate for the producer price index was 1.8%. Core inflation, which excludes food and energy, is expected to be at 2.6% for the PCE in September. Fed officials attribute the high core inflation to rising shelter costs, which they believe will decrease as rents stabilize. Overall, inflation for the third quarter is running at just 1.4%, below the Fed’s target of 2%.
The slowdown in inflation could lead the Federal Reserve to continue cutting interest rates. The half-percentage point cut in September was seen as unprecedented for an economy in expansion, but further rate cuts may be necessary. Some economists suggest a quarter-point cut at the November and December meetings, while others caution against aggressive easing. Lowering rates too quickly could lead to a spike in consumer demand, putting pressure on businesses to keep up with increased costs. Fed Chair Jerome Powell expects housing inflation to decrease, providing an opportunity for further disinflation.
Goldman Sachs projects that the PCE index will reach 2% in the near future, meeting the Fed’s inflation target. The Cleveland Fed’s “inflation nowcasting” dashboard also predicts a rate just above 2% for September. However, core inflation rates, which exclude food and energy, remain high. The Fed is closely monitoring these trends to determine the appropriate course of action. Fed officials are optimistic that inflation will continue to decrease, allowing the central bank to focus on maintaining economic stability.
As the Federal Reserve considers its next steps, policymakers will need to carefully balance the need to control inflation with the impact of further rate cuts on the economy. The labor market and economic conditions are key factors in determining the appropriate response. Atlanta Fed President Raphael Bostic has indicated a willingness to skip a rate cut at the November meeting, suggesting a more cautious approach. Futures traders are betting on further rate cuts in the coming months, indicating market expectations for continued easing measures by the Fed. Overall, the inflation data provides valuable insight into the current state of the economy and the challenges faced by policymakers in maintaining stability.
