Summary: US core PCE price index up 0.2% in October, as expected; annual rate slows to 3.5%; NAB: decline in recent months impressive; Treasury yields rise; Fed rate-cut expectations for 2024 soften; ANZ: clear step down in core inflation pressures.
One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since increased significantly and still remains above the Fed’s target even after recent declines.
The latest figures have now been published by the Bureau of Economic Analysis as part of the October personal income and expenditures report. Core PCE prices rose by 0.2% over the month, in line with expectations but less than September’s 0.3% increase. On a 12-month basis, the core PCE inflation rate slowed from September’s rate of 3.7% to 3.5%.
“To put these numbers into perspective, back in July the core PCE was 4.3%, so the decline in recent months has been quite impressive with the 3-month annualised rate now ticking at just 2.2%,” said NAB senior FX strategist Rodrigo Catril.
US Treasury bond yields rose noticeably on the day despite the figures. By the close of business, the 2-year Treasury bond yield had added 6bps to 4.71%, the 10-year yield had gained 9bps to 4.35% while the 30-year yield finished 8bps higher at 4.52%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months softened. At the close of business, contracts implied the effective federal funds rate would average 5.33% in December, in line with the current spot rate, 5.335% in January and 5.29% in March. November 2024 contracts implied 4.41%, 92bps less than the current rate.
“There is a clear step down in core inflation pressures,” said ANZ Head of FX Research Mahjabeen Zaman. “In Q1, the 3-month average was 0.37%, [in] Q2 it was 0.32% and now the 3-month average is 0.2%.”
The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; the Fed also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.