The Federal Reserve’s restrictive monetary policy is working, with inflation cooling in September relative to a year ago, based on the latest government data. But while there are signs that price growth is heading in the right direction, Americans’ spending remains strong and could complicate the central bank’s mission.
Based on the core personal-consumption expenditures price index, which excludes the more volatile food and energy sectors, the pace of inflation slowed in September to 3.7% year over year, according to the latest Bureau of Economic Analysis data, released Friday. That’s in line with forecasts and slightly below the 3.8% revised rate recorded in August. Core PCE is closely studied by the Fed.
Even though annual comparisons showed cooling, price growth ticked up on a monthly basis from August to September. Core PCE climbed by 0.3% in September, in line with expectations and up from the 0.1% rate recorded in August, according to the latest data.
Today’s PCE inflation report provided confirmation that the Fed’s monetary policy is continuing to reduce inflation over time, albeit slowly, writes Brian Pietrangelo, managing director of investment strategy at Key Private Bank. “Investors should view this pace of declines in inflation as generally positive and remain cautiously optimistic that inflation will abate going forward.”
The overall PCE inflation rate, which includes food and energy prices, was 3.4% year over year in September, a pace that has been unchanged for the past three months. Month over month, headline inflation also held steady at 0.4% in September, matching the monthly inflation pace seen in August.
The Bureau of Economic Analysis noted in its release on Friday that it had updated previously reported estimates for July and August. The Bureau revised down the annual pace of core PCE from 3.9% in August to 3.8%. Headline PCE shifted down as well, from the 3.5% rate recorded year over year to 3.4%. The monthly pace remained unchanged.
September’s inflation was driven by an uptick in energy prices, which climbed 1.7% month to month, but slipped 0.1% from a year ago. Food prices rose 0.3% from August to September, and 2.7% in September from a year prior.
Prices for services increased by 4.7% compared with a year ago, while goods expenses rose 0.9%, according to the BEA data.
Consumer spending remained robust in September, rising by $138.7 billion, or 0.7%. Services accounted for much of the gain. International travel and flights, as well as housing and healthcare spending on hospitals and nursing homes were some of the biggest contributors to personal-consumption expenditures.
Within goods, consumers spent heavily on durable goods, particularly new and used vehicles. But nondurable products continued to show strength as well, led by prescription drug purchases.
“Consumer spending remains sturdy, but cannot continue at this pace,” writes Gus Faucher, PNC’s chief economist. He noted that when adjusted for inflation, spending rose at a 4% annualized pace in the third quarter, much more than income gains. Overall, Friday’s report indicates that Americans are now spending more than they are bringing in when adjusted for inflation. Personal income increased by $77.8 billion, or about 0.3% in September, down from the 0.4% pace seen in August.
Savings rates continue to fall. The personal savings rate as a percentage of disposable personal income fell to 3.4% in September from 3.9% in August. “At some point consumers will need to slow their spending growth, but for now the strong labor market is supporting gains despite the drag from higher interest rates,” Faucher said.
Friday’s report indicated that the U.S. economy could see further disinflation, writes Andrew Patterson, Vanguard’s senior economist. But Thursday’s gross domestic product estimate that revealed economic growth hit 4.9% in the third quarter highlights the “bumpy road ahead” and suggests the Fed might have to hold interest rates higher for longer.
Write to Megan Leonhardt at megan.leonhardt@barrons.com
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