The Fed's favorite inflation measure cooled in October

A key measure of consumer prices slowed somewhat in October, another hopeful sign that inflation pressures could be moderating.

The Personal Consumption Expenditures price index, or PCE, rose 6% in October compared to a year earlier, the Commerce Department reported Thursday. That’s down from the upwardly revised 6.3% annual increase reported for September.

PCE is the Federal Reserve’s preferred inflation gauge since it gives a more complete picture of consumer prices.

Prices rose by 0.3% in October compared to September, the same monthly increase as in each of the previous two months.

Stripping out volatile food and energy, core PCE rose 5% over the last 12 months and 0.2% month on month. That compares to September’s upwardly revised 5.2% annual increase and a month-on-month jump of 0.5%.

The 12-month gain in core PCE matched the forecasts of economists surveyed by Refinitiv, while the one-month gain was slightly lower than the 0.3% rise that had been forecast.

Inflation pressures have become a major concern for the US economy, prompting the Fed to hike interest rates at an unprecedented rate in an effort to get prices under control.

Fed Chairman Jerome Powell said in a speech Wednesday that the Fed could pull back on the pace of its aggressive rate hikes as soon as December. While Powell has stressed the importance of not relying on one particular data point, Thursday’s inflation reading likely confirms that plan.

“Given this inflation data, the Fed should be comfortable with a downshift in the pace of rate hikes at the upcoming meeting,” wrote Jeffrey Roach, chief economist for LPL Financial, in a note Thursday.

The PCE report also showed big jumps in both personal income and personal spending. Personal income jumped 0.7% in October, up from a 0.4% increase in September. And spending by individuals rose 0.8% in the latest reading, and by 0.5% when the effect of higher prices was taken into account. It was the biggest jump in inflation-adjusted spending since January. The main drivers of the increased spending was new cars and trucks, furniture and other big-ticket items for the home and eating out.

Both of those readings could feed underlying inflation pressures going forward. Greater demand for goods and services can push prices higher unless there is a corresponding increase in supply to meet that demand. And higher income — fueled by the strong labor market — tends to fuel greater demand.

“The consumer spending numbers … included in this month’s release show that households also seem to refuse to give up their spending habits in the face of gathering economic storm clouds,” wrote Kurt Rankin, senior economist for PNC, in a note Thursday.

“A shift back toward big-ticket household … spending could represent a classic signal of inflation’s self-perpetuation. When consumer see prices constantly rising, they tend to buy now rather than risk a higher price in the future.”

But if the report was something of a mixed set of data for the Fed, with the lower inflation balanced by higher incomes and spending, that combination was good news for the Biden administration, which took the unusual step of commenting on a report that rarely gets attention from the White House.

“We are seeing initial signs that we are making progress in tackling inflation, even as we make the transition to more steady, stable economic growth,” wrote President Joe Biden in a statement released Thursday morning. “The American people should have confidence that our plan to tackle inflation, without giving up all the historic economic gains American workers have achieved, is working.”

This story is developing and will be updated.

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