Year-Over-Year Core PCE Remains Steady
The latest September Personal Consumption Expenditures (PCE) inflation data revealed a stable yet nuanced inflation landscape. The PCE price index increased 0.2% month-over-month and 2.1% year-over-year, reflecting ongoing moderation in price growth. Meanwhile, the core PCE price index, which excludes volatile food and energy prices, rose by 0.3% MoM and remained steady for a third consecutive month at a 2.7% YoY increase, signaling persistent inflationary pressures in core goods and services. The core PCE, the Federal Reserve's preferred inflation measure, is closely monitored to guide monetary policy.
Real disposable personal income, which adjusts for inflation, edged up 0.1% MoM in September, continuing a gradual growth trend, while real consumer spending (PCE) rose by 0.4%. The spending growth suggests that consumer demand remains resilient despite the Federal Reserve's recent efforts to cool inflation through monetary policy tightening.
However, the personal saving rate declined slightly from 4.8% to 4.6%, indicating that consumers are dipping into savings to maintain their spending habits amid rising prices. This trend could be unsustainable if inflationary pressures do not ease significantly.
Why You Should Care
The steady rise in core PCE and resilient consumer spending present a mixed bag for the Fed as it debates future rate cuts. On the one hand, steady core inflation may warrant continued caution, while resilient spending could indicate that the economy is better positioned to handle a gradual easing of rates. The decrease in the personal saving rate also underscores potential future risks for consumer spending if inflation remains persistent, suggesting that the Fed will need to tread carefully in balancing inflation control with economic growth.
PCE vs. CPI
The PCE and Consumer Price Index (CPI) are both measures of inflation but differ in scope and methodology. PCE covers a broader range of expenditures, including healthcare costs paid on behalf of consumers, while CPI focuses on out-of-pocket expenses. PCE also uses chain weighting, making it more adaptive to consumer behavior changes, whereas CPI uses a fixed basket of goods. The Fed prefers PCE for its comprehensive coverage and flexibility.
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