PCE inflation rises to 3.6% in September

PCE inflation accelerates

The personal consumption expenditures price index, the Federal Reserve's preferred inflation gauge, rose 3.6% in September from a year earlier, the Bureau of Economic Analysis said. That was up from 3.4% in August. On the month, the index gained 0.5% after a 0.3% increase in August, Quartz reported.

Excluding food and energy, core PCE rose 3.1% over the year, up from 3.0% in August. It rose 0.3% on the month in September, Quartz reported, after 0.2% in August, Hindustan Times reported. Headline and core PCE both accelerated on monthly and annual measures in September. The Fed's stated target is 2% a year, NerdWallet reported.

CPI is the most commonly used inflation proxy, NerdWallet reported. The FOMC uses core PCE as its preferred inflation measure. The gap between 3.1% and 2% is the central problem for the Fed.

The Fed holds after September hike

The Fed left its target range at 3.75% to 4% on Wednesday 28 October. The vote was 10-2, with both dissenters favoring a 25 basis point increase, TradingKey reported. The hold followed September's hike, the first in more than three years, Quartz reported.

Fed Chair Kevin Warsh used his press conference to argue that the central bank's job is to stop one sector's price rise from becoming everyone's. "Energy and related prices have risen again in recent weeks, and our job is to ensure that relative price changes in certain sectors do not spread across the broader economy," Warsh said, according to economy.ac. He added that he does not favor signaling policy decisions in advance.

The September projections put 12 of 18 officials behind one more 25 basis point increase this year. Four backed two increases and two backed none, TMGM reported.

Economists were divided. Hindustan Times reported before the decision that Deutsche Bank's chief US economist Matt Luzzetti expected Warsh to say rising inflation could force the Fed to raise rates in future. Luzzetti also warned that Warsh would want to avoid repeating the confusion of his July press conference.

Energy and wholesale prices add pressure

Consumer prices rose 3.7% in the 12 months to September, up from 3.4% in August, NerdWallet and Hindustan Times reported, citing Bureau of Labor Statistics figures. The monthly CPI gain was 0.6%, against 0.4% in August. Gasoline climbed 9.1% during September alone, Quartz reported.

The energy move follows higher oil prices. US crude sells for more than $100 a barrel, against under $70 before the fighting with Iran began, Quartz reported. The national average for a gallon of gasoline is roughly $4.25.

Wholesale prices show the same pressure further back in the chain. PPI rose 1.3% in September and 6.3% over the year, the largest annual increase since December 2022, when the index rose 6.4%, NerdWallet reported.

Economy.ac reported that caution has spread on the FOMC because monetary policy cannot directly control supply shocks caused by a prolonged Middle East war. The report said the policy path depends on whether shipping through the Strait of Hormuz returns to normal and how quickly global oil prices stabilize.

Households spend more as real income falls

Personal income rose 0.2% in September and personal spending rose 0.5%, the Bureau of Economic Analysis said. Real personal consumption expenditure rose less than 0.1%, and real disposable personal income fell 0.3%. The personal saving rate was 3.8%.

Read together, those figures describe households spending more to buy roughly the same. After-tax income shrinks once inflation is taken out. Headline CPI at 3.7% is nearly double the Fed's 2% target, NerdWallet reported. The release came just before midterm elections, with the cost of living a leading concern for voters, the Associated Press reported.

What happens next

The next CPI report is due on 10 November. The October personal income and outlays release is scheduled for 25 November at 8:30 a.m. ET, the Bureau of Economic Analysis said.

The final FOMC meeting of the year is on 9 December, TMGM reported. After the October hold, CME FedWatch put the probability of a December hike at about 78%, down from 84%, TradingKey reported. A separate reading cited by TMGM put the odds of rates staying unchanged through year-end at about 17%.

Economists disagree in public. Seema Shah of Principal Asset Management expects hikes in December and early 2027, economy.ac reported. Kay Haigh of Goldman Sachs Asset Management expects the Fed to resume in December.