Summary: US core PCE price index up 0.3% in October, in line with expectations; annual rate ticks up to 2.8%; Westpac: disinflation progress appears to be stalling; Treasury yields fall; Fed rate-cut expectations firm.
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 0.3% over the month, in line with expectations as well as September’s increase. On a 12-month basis, the core PCE inflation rate ticked up from 2.7% to 2.8%.
“This marked an acceleration in the annual pace of inflation on both headline and core measures, while monthly momentum was unchanged on September,” said Westpac economist Jameson Coombs. “While the risks of a renewed inflation outbreak remain low, disinflation progress appears to be stalling, supporting the Fed’s cautious approach to policy easing.”
US Treasury bond yields fell moderately along the curve on the day. By the close of business, the 2-year Treasury bond yield had lost 2bps to 4.23%, the 10-year yield had shed 4bps to 4.26% while the 30-year yield finished 3bps lower at 4.44%.
In terms of US Fed policy, expectations of a lower federal funds rate in the next 12 months firmed, with another two 25bp cuts currently factored in. At the close of business, contracts implied the effective federal funds rate would average 4.51% in December, 4.415% in January and 4.365% in February. October 2025 contracts implied 3.92%, 66bps 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.
