Summary: US core PCE price index up 0.3% in September, in line with expectations; annual rate steady at 2.7%; ANZ: core PCE deflator largely unchanged for past five months; Treasury yields decline; Fed rate-cut expectations firm, four 25bp cuts priced in.
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 greater than August’s 0.1% increase. On a 12-month basis, the core PCE inflation rate remained steady at 2.7%.
“On a headline basis, disinflation is running faster than the FOMC had forecast,” said ANZ economist Jack Chambers. “The core measure is firmer. It rose 0.254% in September, the highest monthly rise since April. That left the annual rate at 2.7%, pretty much where it has been for the past five months.”
US Treasury bond yields declined by modest amounts along the curve on the day. By the close of business, the 2-year Treasury bond yield had lost 2bps to 4.17%, the 10-year yield had slipped 1bp to 4.29% while the 30-year yield finished 2bps lower at 4.48%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed a little, with another four 25bp cuts currently fully factored in. At the close of business, contracts implied the effective federal funds rate would average 4.65% in November, 4.51% in December and 4.25% in February. September 2025 contracts implied 3.74%, 109bps 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.
