Consumer inflation rose in October, signaling persistent pricing pressures that could complicate the Federal Reserve's approach to easing interest rates in the months ahead. According to the Commerce Department's report on Wednesday, the personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, increased by 2.3% compared to a year earlier, up from 2.1% in September. Excluding volatile food and energy prices, core inflation climbed 2.8% year-over-year, a slight uptick from September's 2.7%.
The monthly report revealed that inflation remains stubbornly above the Fed's 2% target, despite aggressive monetary policy measures over the past two years. Core inflation, a metric closely monitored for its predictive value, has oscillated between 2.6% and 2.8% since February. Analysts attribute this to persistent cost increases in service sectors such as housing, dining, and insurance.
Omair Sharif, chief economist at Inflation Insights, noted the significance of the October figures. "This report will likely provide further ammo to Fed officials who prefer to lower rates gradually and may strengthen the argument for a pause at the December FOMC meeting," Sharif wrote in a client note.
Consumer spending also showed resilience, rising 0.4% in October, matching expectations. Meanwhile, personal incomes grew by 0.6%, double economists' forecasts. While household budgets benefited from stable food prices and declining energy costs-gasoline prices fell to an average of $3.07 per gallon nationwide in November-certain categories saw sharp price hikes. Used vehicle prices jumped 2.8% from September, while airfare rose 1.5% over the month and 5.1% year-over-year.
Housing-related costs remained a notable inflation driver, increasing 0.4% in October, despite expectations of a slowdown due to easing rents. Services, which include housing and healthcare, posted a 0.4% rise, while goods prices fell 0.1%, reflecting the complex dynamics shaping consumer price trends.
Markets have already begun adjusting expectations for the Fed's December meeting. Odds of a quarter-point rate cut now stand at 66%, according to CME Group's FedWatch tool, as investors weigh the implications of higher inflation against strong economic fundamentals.
Ryan Sweet, chief U.S. economist at Oxford Economics, expressed cautious optimism. "The momentum in inflation toward the Fed's 2% target has sputtered recently but not enough, in our view, to prevent the Fed from cutting interest rates in December," Sweet wrote.
The October data arrives as the Fed has already implemented back-to-back rate cuts in September and November, totaling 0.75 percentage points. These reductions followed 11 hikes since March 2022, designed to counter the rapid inflation surge that peaked at 7.2% in mid-2022.
President-elect Donald Trump's economic proposals could further influence the Fed's decision-making. Plans to implement tax cuts, reduce regulations, and potentially impose tariffs could spur faster economic growth while posing inflationary risks. Analysts suggest that Trump's policies might lead the Fed to temper its pace of rate reductions to prevent overheating the economy.
Beyond policy implications, the cumulative impact of inflation remains a challenge for households, particularly lower-income families. While inflation has decelerated significantly from its 2022 peak, cumulative price increases since 2021 have strained household budgets, leaving many grappling with elevated costs for everyday necessities.
Fed officials have acknowledged that navigating inflation remains a delicate balancing act. The central bank relies on a range of indicators, including the PCE index, to guide its policy moves. While confident that inflation is broadly trending toward its target, Fed members have signaled caution, advocating for gradual rate adjustments to account for economic uncertainties.
