Summary: US core PCE price index up 0.2% in October, less than expected; annual rate slows from 5.2% to 5.0%; reflects a number of one-offs; Treasury yields noticeably lower; Fed rate-rise expectations soften.
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 above the Fed’s target.
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, less than the 0.3% which had been generally expected and September’s 0.5%. On a 12-month basis, the core PCE inflation rate slowed from September’s revised rate of 5.2% to 5.0%.
“The softer-than-expected 0.2% rise in core PCE inflation probably reflects a number of one-offs and monthly price gains may snap back,” said ANZ economist Jack Chambers.
US Treasury bond yields fell noticeably on the day. By the close of business, the 2-year Treasury bond yield had shed 11bps to 4.22%, the 10-year yield had lost 9bps to 3.51% while the 30-year yield finished 14bps lower at 3.60%.
In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months softened. At the close of business, contracts implied the effective federal funds rate would average 4.1225% in December, 30bps higher than the current spot rate, and then climb to an average of 4.685% in February 2023. May 2023 futures contracts implied a 4.865% average effective federal funds rate while November 2023 contracts implied 4.575%.
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.