Summary: US core PCE price index up 0.3% in September, as expected; annual rate slows 3.8% to 3.7%; ANZ: improvement slightly ahead of FOMC projections; Treasury yields generally fall; Fed rate-cut expectations for 2024 firm a little.
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 September personal income and expenditures report. Core PCE prices rose by 0.3% over the month, in line with expectations but more than August’s 0.1% increase. On a 12-month basis, the core PCE inflation rate slowed from August’s revised rate of 3.8% to 3.7%.
“Core inflation actually came in at 3.7% in September, so the improvement in annual inflation is coming slightly ahead of the FOMC’s projections,” said ANZ economist Kishti Sen. “The FOMC will be comfortable with its inflation forecasts for now.”
US Treasury bond yields generally fell on the day. By the close of business, the 2-year Treasury bond yield had lost 3bps to 5.01%, the 10-year yield had slipped 1bp to 4.84% while the 30-year yield finished 3bps higher at 5.02%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed a little. At the close of business, contracts implied the effective federal funds rate would average 5.33% in November, in line with the current spot rate, 5.355% in December and 5.375% in January. September 2024 contracts implied 4.92%, 41bps less than the current rate.
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.