A new series of inflation data released on Friday showed that while prices remained uncomfortably high in September, a slowdown in wage growth indicates some relief may be in the offing. This is an encouraging development for the Federal Reserve, which is struggling to reduce the highest inflation of the past 40 years.
The Personal Consumption Spending Index, which measures the prices consumers pay for goods and services, increased by 0.3% from August to September, but remained unchanged at 6.2% for the year, according to the latest report from the Bureau of Economic Analysis.
The Core PCE, which excludes food and energy price volatility and is the Fed’s preferred measure of inflation, rose 5.1% year-on-year, above the August 4.9% rate but below. below the consensus estimate of 5.2%, for Refinitiv.
From August to September, the benchmark index grew by 0.5%, in line with estimates. The previous month’s jump was revised to 0.5% from 0.6%.
Separately, the Bureau of Labor Statistics released its latest employment cost index, which shows slowing growth in quarterly wages and wages in labor costs. The central bank is watching the ECI report closely to monitor to what extent the soaring inflation is driving up wages and fueling inflation.
The latest numbers come just days before the Fed gathers to discuss another rate hike and as Americans go to the polls to vote in the mid-term elections.
“These data confirm that the Federal Reserve still has work to do to cool demand and reduce inflation and keep policymakers on track to raise the federal funds rate by an additional 75 basis points at the FOMC meeting next week. “Gregory Daco, senior economist at EY Parthenon, said in a statement.
But some of the basic measures indicating a slowdown on the horizon could mean that next week’s rate hike – which is expected to be the fourth consecutive 75bp hike – could be the last of this magnitude, said economist Mark Zandi, head of Moody’s. Analytics.
“There are many moving parts, many assumptions, but I think the most likely scenario is that we are at the worst of inflation and should be within reach of the Fed again. [2%] target by spring 2024, “he said.
Consumers have struggled for months with prices that have remained firmly stuck at levels not seen since the 1980s. Despite a series of giant rate hikes by the Fed in an effort to tame inflation, the latest consumer price index, which measures the cost of anything – eggs to airline tickets – has shown that price hikes continue. rising and inflation even spread from goods in the service sector in September.
The latest PCE report showed that Americans continued to spend beyond their means: Consumer spending increased by 0.6% in September from August, and incomes rose by 0.4%, while savings levels were up. decreased.
Even adjusting to inflation, expenses exceeded revenues.
“Monetary policy is lagging behind, but at this early stage consumer spending is more or less immune to high inflation and rate hikes to keep prices in check,” Wells Fargo economists Tim Quinlan and Shannon Seery. .
Consumers, however, are not necessarily optimistic about the economy and its future prospects.
The University of Michigan Consumer Sentiment Index for October came in at 59.9, according to updated survey data released Friday. This is only 10 index points above the all-time low reached in June.
“This month, the terms for purchasing durable goods have increased by 23% thanks to the easing of prices and supply constraints; however, the economic conditions forecast for next year have worsened by 19%, “said Joanne Hsu, director of investigations.” These divergent patterns reflect substantial uncertainty about inflation, policy responses and developments around the world and consumer views are consistent with an upcoming recession in the economy. ”
Beyond the consumer sector, the broader economic picture is darkening, Daco said.
“Rapidly rising interest rates, persistent high inflation and high global uncertainty are eroding corporate sentiment and pushing companies to make more cautious hiring and investment decisions.”
And with the housing market already faltering under the weight of rising mortgage rates, the full economic impact of Fed policy tightening has yet to be felt, he said.
Tami Luhby of CNN Business contributed to this report.