Inflation in the United States cooled in September, edging closer to the Federal Reserve's long-standing 2% target, according to a report from the Commerce Department on Thursday. The Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation measure, showed a 2.1% annual increase, down slightly from August's 2.3%, with a monthly increase of 0.2% in line with market forecasts.
In a move that suggests steady, moderate economic momentum, core inflation-stripped of volatile food and energy prices-also rose by 0.3% month-over-month, maintaining an annual rate of 2.7%, the same as August. Economists had anticipated a 2.6% rise, and this steady performance indicates that core price pressures remain a touch above the Fed's target, despite broader inflation moving closer to desired levels.
"The bottom line is that the labor market remains strong, inflation is broadly disinflationary with some bumps along the road, and economic growth is solid," said Olu Sonola, head of U.S. economic research at Fitch Ratings, in a report issued Thursday. Sonola further suggested that the new data increases the likelihood of a rate cut in the Fed's upcoming meeting, as inflationary pressures show signs of sustained cooling.
The overall decline in inflation has fueled expectations that the Fed may continue its recent trend of easing interest rates. Markets are currently pricing in a likely reduction in the Fed's benchmark interest rate at its November meeting, a shift driven by softer inflation data and a stable labor market. In September, the Fed lowered rates by 0.5%, a rare move during economic expansion, as part of an ongoing effort to adjust monetary policy for moderate growth.
The new inflation data revealed further insights into shifting consumer spending patterns. Service prices rose by 0.3%, with inflation in goods prices dropping 0.1%-the fourth instance of deflation in this category over five months. The latest figures show a delicate balance, as housing prices climbed at a moderate 0.3% pace, while energy prices slipped by 2%. Falling gas prices in particular have helped relieve upward pressure on inflation, with many states now seeing prices dip below $3 per gallon.
Additionally, the U.S. labor market remains steady, with initial filings for unemployment benefits dropping to 216,000 for the week ending October 26, down from 228,000 the previous week, and below the projected 230,000 figure. This trend reinforces the view that employers are largely retaining workers, providing stability for a workforce that fuels continued consumer spending.
Personal income, meanwhile, rose by 0.3% for September, matching analysts' forecasts and slightly above August's increase, while consumer spending grew by 0.5%. The slight rise in personal savings to 4.6% for the month suggests consumers are cautiously optimistic, buoyed by stable employment and easing inflation. The broader economic picture remains balanced, with steady consumer spending offsetting other economic headwinds.
While the Fed is expected to review a variety of economic indicators in its upcoming deliberations, inflationary moderation, especially within core PCE metrics, is likely to weigh significantly on their rate policy decisions. Policymakers have emphasized achieving a soft landing, or gradual economic cooling, to maintain robust employment while guiding inflation closer to the 2% target. As of September, however, the Fed had yet to achieve this target consistently, with headline inflation only recently nearing desired levels.
The anticipated rate cut is driven by a broad consensus that inflation will remain subdued and continue trending downward, making tighter monetary policies less critical to the economic outlook. This sentiment has been reinforced by stable employment costs, which rose by 0.8% in the third quarter-just below analysts' expectations. Over the past 12 months, employment costs, including wages and benefits, have risen by 3.9%, outpacing the 2.4% increase in consumer prices.
Further evidence of a decelerating economy surfaced in other market indicators, including Thursday's Bureau of Labor Statistics report on the Employment Cost Index, showing a minor 0.1% miss on growth forecasts. Yet, on a 12-month basis, employment costs rose by 3.9%, reinforcing the Fed's confidence in a controlled inflationary environment.
The Fed's preferred inflation metric, PCE, has shown disinflationary trends in recent months, bolstered by easing supply chain constraints and stable demand. In particular, energy prices have shown signs of deflation, declining by 2% month-over-month, while falling global gas prices are anticipated to continue through the end of the year as supply outpaces demand. Notably, consumer resilience has also supported a steady economy, with retail and service sectors holding their ground.
