The Fed’s Preferred Inflation Gauge Approaches a Key Threshold
Explore how the Federal Reserve’s favored inflation metric is nearing a pivotal 2% annual rate, signaling potential price stability with important nuances.
Diccon Hyatt is a seasoned financial and economics journalist who has extensively reported on the pandemic-era economy through hundreds of articles over the past two years. He specializes in translating complex financial topics into clear language, highlighting their effects on personal finances and the broader market. His experience includes work with U.S. 1, Community News Service, and the Middletown Transcript.
Key Insights
- Economists forecast that inflation, measured by the Personal Consumption Expenditures (PCE) Price Index, will decrease to a 2.1% annual rate in September, edging closer to the Federal Reserve’s 2% target for stable inflation.
- If confirmed, this would mark the lowest year-over-year inflation rate since March 2021.
- Despite this progress, Federal Reserve officials remain cautious, focusing primarily on core inflation—which excludes volatile food and energy prices—and which remains above the 2% goal.
Inflation is approaching a 2% annual rate, aligning with the Federal Reserve’s benchmark for price stability, yet this milestone comes with important caveats.
According to forecasts compiled by Dow Jones Newswires and The Wall Street Journal, a forthcoming report from the Bureau of Economic Analysis is expected to reveal that the cost of living increased by 2.1% over the past 12 months as of September. This Personal Consumption Expenditures Price Index reading is a slight decline from August’s 2.2% and represents the lowest inflation level in over three years.
This report will be closely watched by economists as the Federal Reserve targets a 2% annual inflation rate when setting monetary policy.
Understanding the Nuances of PCE Inflation
The Federal Reserve primarily monitors core PCE inflation, which excludes the often-volatile food and energy sectors. This approach helps policymakers assess underlying inflation trends without the noise of short-term price swings.
In August, core PCE inflation was 2.7%, with forecasts predicting a slight decrease to 2.6%. While this remains above the Fed’s 2% target, it is significantly lower than the peak of 5.6% observed in February 2022.
Declining gasoline prices have contributed to the overall reduction in inflation, but core inflation has remained persistently elevated, largely due to higher-than-expected shelter costs.
The upcoming report may reveal some short-term increases in monthly inflation despite improvements in year-over-year figures. Overall inflation is expected to have risen by 0.2% from August to September, up from a 0.1% increase the prior month. Core inflation is forecasted to increase by 0.3% monthly, compared to 0.1% in August, reflecting similar trends observed in the Consumer Price Index released earlier this month by the Bureau of Labor Statistics.
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