The numbers: The rate of U.S. inflation stayed stuck close to 3% before the government shutdown, a long-delayed report showed, providing a final piece of the puzzle before the Federal Reserve votes on whether to cut interest rates again.
The personal consumption expenditures index for September probably won’t play a key role during the Fed debate next week, since the report is two months late. Yet it does show inflation was stable, if elevated, in the early fall.
The PCE index rose 0.3% in September, with a smaller 0.2% increase in the core rate. The core rate omits food and energy and is a better predictor of future inflation.
The yearly increase in inflation edged up to 2.8% in September from 2.7% in the prior month, leaving the rate well above the Fed’s 2% goal.
In a good sign, the 12-month increase in the core rate slipped to 2.8% from 2.9%.
Some Fed officials are worried about inflation and don’t want to cut interest rates at their Dec. 9-10 meeting.
Others see an emerging hiring freeze as the biggest threat to the economy. They want to lower borrowing costs to help stabilize the labor market.
Investors widely believe the Fed will cut rates again.
Key details: The cost of goods — which are most affected by tariffs — rose a sharp 0.5% in September. That’s the biggest increase since the start of the year.
The cost of services, however, rose a scant 0.1% and has been somewhat tame since the spring. Services had been the biggest source of inflation before the Trump tariffs were put in place.
Big picture: The Fed is not done cutting interest rates, but as long as inflation is stuck above the central bank’s 2% goal, top officials are sure to proceed cautiously.
While lower rates will help the economy, ongoing uncertainty tied to higher U.S. tariffs could continue to hold the economy back.
Looking ahead: “Softer consumer spending and core inflation figures should cement a Fed rate cut next week while keeping the door open for more easing next year,” said Sal Guatieri, senior economist at BMO Capital Markets.
