A fresh batch of inflation data released on Friday showed that while prices remained uncomfortably high in September, a slowdown in wage growth indicates some relief may be in sight. It’s an encouraging development for the Federal Reserve, which is battling to bring down the highest inflation in 40 years.
The personal consumption expenditure index, which measures the prices consumers pay for goods and services, rose 0.3% from August to September but remained unchanged at 6.2% for the year, according to the latest report from the Bureau of Economic Analysis.
Core PCE, which excludes volatile food and energy prices and is the Fed’s preferred measure of inflation, rose 5.1% on an annual basis, higher than August’s rate of 4 .9% but below the consensus estimate of 5.2%, per Refinitiv.
From August to September, the benchmark index increased by 0.5%, in line with estimates. The previous month’s jump was revised down to 0.5% from 0.6%.
Separately, the Bureau of Labor Statistics released its latest Employment Cost Index, which shows slowing growth in quarterly wages and salaries in labor costs. The central bank is watching the ECI report closely to monitor the extent to which soaring inflation is pushing up wages and fueling inflation.
The latest figures come just days before the Fed meets to discuss another rate hike – and as Americans head to the polls to vote in the midterm elections.
“These data confirm that the Federal Reserve still has work to do to cool demand and reduce inflation and keep policymakers on track to raise the federal funds rate an additional 75 basis points at the FOMC meeting. next week,” Gregory Daco, senior economist at EY Parthenon, said in a statement.
But some of the underlying measures which indicate a slowdown is on the horizon could mean that next week’s rate hike – which is expected to be the fourth consecutive 75 basis point hike – could be the last of this magnitude, said economist Mark Zandi. chief at Moody’s Analytics.
“There are a lot of moving parts, a lot of assumptions, but I think the most likely scenario is that we’re at the worst of inflation, and it should be back within reach of the Fed. [2%] goal by spring 2024,” he said.
Consumers have grappled for months with prices that have remained firmly stuck at levels not seen since the 1980s. Despite a series of giant rate hikes from the Fed in its bid to tame inflation, the latest consumer price index – which measures the cost of everything from eggs to plane tickets – showed that price increases continue to rise and inflation has even spread from goods in the service sector in September.
The latest PCE report showed Americans continued to spend beyond their means – consumer spending rose 0.6% in September from August and incomes rose 0.4%, while savings levels have fallen.
Even adjusting for inflation, expenses exceeded revenues.
“Monetary policy is acting with a lag, but at this early stage consumer spending is more or less immune to high inflation and rate hikes aimed at containing prices,” Wells Fargo economists Tim Quinlan and Shannon Seery. .
Consumers, however, are not necessarily optimistic about the economy and its future prospects.
The University of Michigan consumer sentiment index for October came in at 59.9, according to updated survey data released Friday. That’s just 10 index points above the all-time low reached in June.
“This month, terms for buying durable goods jumped 23% on the back of easing prices and supply constraints; however, expected business conditions for the coming year have deteriorated by 19%,” said Joanne Hsu, Director of Investigations. “These divergent patterns reflect substantial uncertainty about inflation, policy responses and developments around the world, and consumer views are consistent with a coming recession in the economy.”
Beyond the consumer sector, the broader economic picture darkens, Daco said.
“Rapidly rising interest rates, persistently high inflation and elevated global uncertainty are eroding business sentiment and prompting companies to make more cautious hiring and investment decisions.”
And with the housing market already reeling under the weight of soaring mortgage rates, the full economic impact of Fed policy tightening has yet to be felt, he said.
CNN Business’ Tami Luhby contributed to this report.
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