The U.S. economy seems to be experiencing a slight cool-down, and Federal Reserve officials are expecting inflation to follow suit. The upcoming October PCE inflation report, set to be released on Thursday morning, will serve as a significant indicator.
According to economists surveyed by The Wall Street Journal, the core rate of PCE inflation is predicted to see a modest 0.2% increase. The Fed regards the core rate, which excludes food and energy prices, as the most reliable predictor of future inflation.
While food and gas prices are not disregarded by senior Fed officials, they can be quite volatile and may provide misleading signals about overall inflation trends.
If the forecast holds true, the annual increase in core inflation would slow to approximately 3.5%, down from the previous month’s 3.7%. This would mark the smallest rise since April 2021.
However, the Federal Reserve’s task is far from complete. The inflation rate remains well above the bank’s 2% target and is more than double the average annual increase seen between 2010 and 2019.
The crucial question now is whether the Fed will need to raise interest rates once again in order to further temper the economy and ensure inflation decelerates towards its 2% objective.
Currently, most Fed officials and Wall Street investors believe that interest rates are at an adequate level to accomplish this goal.
The Bank Raises Benchmark Rate as Economy Slows
The bank has recently made the decision to increase its benchmark short-term rate, raising it to a top end of 5.5%. This marks a significant change from the near-zero rate it held for the past 18 months and places it at a level not seen in several decades.
In a speech on Tuesday, Fed Gov. Chris Waller expressed confidence in the current policy, stating that it is well positioned to slow down the economy and bring inflation back to 2%.
The impact of higher rates is already being felt throughout the economy. Home purchases and auto sales have slowed down, and business investments have been curtailed as a result. This has led to a downward revision in growth projections for the fourth quarter, with expectations now ranging between 1% and 2%, a significant decline from the robust 5.2% growth seen in the third quarter.
Despite these measures, concerns about inflation still persist. Fed Gov. Michelle Bowman stressed the need for caution, noting that the central bank should remain on guard against any further increases in prices. The Fed has been caught off guard by inflationary pressures in the past, and the potential for another uptick should not be underestimated.
One indicator to watch closely is the Core PCE (Personal Consumption Expenditures) index. A substantial rise of 0.3% or more could trigger a strongly negative market reaction.
Market participants will eagerly await the release of the PCE report at 8:30 a.m. Eastern time.
In October, overall PCE inflation is expected to show a slight uptick of 0.1%, resulting in a year-over-year rate of 3.1%, down from the previous rate of 3.4%.