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Fed’s Pet Inflation Metric Hits 2-Year Low Of 3.5%

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Inflation sank to its lowest level in more than two years last month, according to the Federal Reserve’s preferred measure released Thursday, as the ongoing dip in price increases fuels a sustained equity market rally.

Key Facts

The core personal consumption expenditures price index, which tracks how much Americans actually spent on goods and services other than the more volatile food and energy inputs, increased 3.5% in October on an annual basis and 0.2% month-over-month, according to the Commerce Department report.

Economists had forecasted the same 3.5% annual jump and 0.2% monthly increase for the index, according to FactSet.

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It’s the lowest annual core PCE reading since April 2021, a dramatic decrease from last October’s 5.3% inflation.

Stocks responded positively to the data’s release, with the Dow Jones Industrial Average up nearly 1% in premarket trading, poised to open near its highest level of 2023.

Contra

Even after nearly halving, annual inflation as measured by the core PCE remains far above the Fed’s 2% long-term target. Prior to the current bout of inflation beginning in 2020, core PCE had not increased by more than 2% since 2018 and had not come in above 3.5% since the early 1990s.

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Key Background

The PCE index, which follows Americans’ spending habits, is typically seen as the U.S.’ secondary inflation gauge after its Labor Department-issued cousin, the consumer price index, which tracks price movements in a typical basket of goods and services for American households. Fed Chairman Jerome Powell has long declared his affinity for the PCE metric, as it tracks overall spending habits and may serve as a better proxy for the net effects of price increases, given it better accounts for price-based substitution decisions. The surge in inflation, which peaked at four-decade highs last summer, spurred the Fed to hike interest rates from near-zero to over 5% over the last two years. Higher rates have slowed economic growth and hurt stocks as borrowing costs grew higher, but the market now largely believes rates have peaked given the progress in inflation, helping spark this month’s equities rally.

Crucial Quote

There is significant deceleration in inflation afoot,” LPL Financial economist Jeffrey Roach wrote in emailed comments, declaring Thursday’s report “solidly mark[s] the end of the rate cycle.”

Further Reading

MORE FROM FORBESCore Inflation Falls To Lowest Level Since September 2021

MORE FROM FORBESGoldman Says Inflation Entering Its ‘Final Descent’ And Interest Rates Will Settle -But They Won’t Return To Near-Zero
MORE FROM FORBESS&P 500 Set For Best Month Of 2023 As Market Gives Thanks To Strong Earnings, More Forgiving Fed

Source: Fox Business

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