Fed's favored inflation gauge showed price growth continued to slow in September

An inflation gauge closely watched by Federal Reserve policymakers continued to slow in September, as the pace of price growth trended closer to the Fed’s target in September.

The Commerce Department on Thursday reported that the personal consumption expenditures (PCE) index rose 0.2% in September and increased 2.1% year over year. Those figures were in line with estimates by economists polled by LSEG.

Core PCE, which excludes volatile food and energy prices, rose 0.3% for the month and increased 2.7% from a year ago, in line with estimates.

The Federal Reserve is focusing on the PCE headline figure as it tries to bring the pace of price increases back to 2%, although policymakers view the core data as a better indicator of inflation. Headline PCE was down from 2.3% in August to 2.1% in September, suggesting inflation continued to cool, while the core PCE was little changed from a month ago.

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The headline PCE data showed that prices for goods declined by 1.2% in September compared with a year ago, while prices for services were up by 3.7%. Food prices were up 1.2% and energy prices were down 8.1% from a year ago.

Wages and salaries were up 0.5% in September from a month ago, the same growth rate as in August. That was slightly higher than the 0.4% growth recorded in July and 0.2% in June, but notably slower than the 1.1% wage growth seen in February.

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The personal savings rate as a percentage of disposable income was 4.6% in September, down from 4.8% in August.

“The year-over-year core PCE print indicated a 2.7% increase suggesting that the Fed is still on a bumpy course in this last mile to quell inflation and declare victory,” said Quincy Krosby, chief global strategist for LPL Financial.

The data comes as the Federal Reserve is preparing to meet next week and discuss its next move on interest rates. 

The market’s expectations about the Fed cutting rates by 25 basis points are little changed following the PCE release, as traders see a 94.1% chance of a cut that size as of Thursday morning compared with a 95.2% chance a day ago, according to the CME FedWatch tool.