PCE inflation rises to 2.3% in October, but December rate cut still expected

Key points

• The PCE inflation rate ticked up to 2.3% in October.

• It is the first increase in the PCE index since July.

• Some 70% of interest rate traders still anticipate a 25-basis point rate cut in December.

The PCE inflation rate rose for the first time since July.

Stocks were moving lower on Wednesday after a key gauge of inflation, Personal Consumption Expenditures (PCE) rose in October.

The PCE index, the preferred inflation gauge of the Federal Reserve, rose to 2.3% in October, up from a 2.1% increase for the September PCE. It is the first time that PCE inflation has gone up since July.

The S&P 500 (-0.5%), Dow Jones Industrial Average (-0.2%), and the Nasdaq Composite (-0.9%) were all trending down on the news. The small cap Russell 2000, however, was up 0.2%.

The inflation rate increase comes just weeks before the Fed’s final meeting of the year on December 17 and 18. Investors may be wondering if it will influence the Fed to pause rate reductions.

PCE in line with expectations

The PCE inflation rate increase was not unexpected, as the 2.3% increase was in line with economists’ expectations. It also tracks to the October rise in the Consumer Price Index (CPI), which jumped to 2.6% from 2.4% in September.

Core PCE inflation, which excludes food and energy prices, climbed 2.8% in October, which was also in line with analysts’ estimates. The 2.8% gain is calculated over a 12-month period.

Over the past 12 months, the prices for goods decreased 1.0% while the prices for services increased 3.9%. Food prices rose 1.0% for the year, while energy prices plummeted 5.9%.

In October, inflation increased 0.2% month-over-month. The price of goods decreased 0.1%, but that was offset by a 0.4% rise in the prices of services. Also, food prices increased less than 0.1% while energy prices decreased 0.1%. Core PCE surged 0.3% in October.

The October report also showed promising news on personal income, which surged 0.6%. That’s better than the 0.3% increase in September and ahead of the 0.3% consensus estimates. Also, disposable personal income rose 0.7% in October, up from 0.3% in September.

What will Fed do?

The Fed’s mandate is for 2% annual inflation, and it had neared that in September at 2.1%. Now it has ticked back up to 2.3%, creating some concerns.

“We have seen considerable progress in lowering inflation since early 2023, but progress seems to have stalled in recent months,” Federal Reserve Governor Michelle Bowman said at a speech last week. “The persistently high core inflation largely reflects pressures on housing services prices, perhaps due to an increase in demand for affordable housing and an inelastic supply.”

However, CME’s FedWatch gauge, which polls interest rate traders, is more bullish on the Fed lowering rates in December. After the PCE report came out, 70% of interest rate traders said they expect a 25-basis point rate cut in December, compared to 59% the previous day. That would suggest the rate moving down to the 4.25% to 4.50% range.

“In our view, another 0.25% cut in December is likely, however with the U.S. economy on strong footing and the potential for inflationary fiscal policy down the road, the Fed will likely take a more gradual approach to rate-cuts in 2025,” Edward Jones analyst Brock Weimer wrote Wednesday in the company’s Daily Market Snapshot.