Fed's favored inflation gauge showed price growth picked up in October

An inflation gauge, closely watched by Federal Reserve policymakers, ticked higher in October, though it remains near the Fed's inflation target.

The Commerce Department on Wednesday reported that the personal consumption expenditures (PCE) index rose 0.2% in October and 2.3% year over year. Those figures were in line with the estimates of economists polled by LSEG.

Core PCE, which excludes volatile food and energy prices, rose 0.3% for the month and increased 2.8% from a year ago, in line with estimates.

The Federal Reserve is focusing on the PCE headline figure as it tries to bring back the pace of price increases back to 2%, although policymakers view the core data as a better indicator of inflation. Headline PCE was up from 2.1% in September and equaled the 2.3% reading from August, suggesting that inflation ticked slightly higher, while the core PCE was little changed from last month.

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The headline PCE data showed that prices for goods were down 1% from a year ago, while prices for services were up 3.9% in that time frame. Food prices were up 1%, while energy prices decreased 5.9% compared with October 2023.

Wages and salaries were up 0.5% in October compared with last month — a slightly higher growth rate than the 0.4% reading in September. That follows monthly wage and salary growth of 0.5% in August and 0.4% in July, which were notably higher than the preceding three months, which were close to zero.

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The personal savings rate as a percentage of disposable income was 4.4% in October, up slightly from the 4.1% measurement last month — though it is down from the roughly 5% level it was at this spring.

The data comes as the Federal Reserve is preparing to meet next month to discuss its next move on interest rates.

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The market's expectations that the Fed will cut rates by 25 basis points next month increased following the PCE release, as traders now see a 69.7% chance of a cut that size at the December meeting — up from 59.4% on Tuesday, according to the CME FedWatch tool.

"The issue for the Fed is that core services inflation, which excludes housing and energy, posted its largest [month over month] increase since March," Ryan Sweet, chief U.S. economist at Oxford Economics, noted. "The momentum in inflation toward the Fed's 2% target has sputtered recently but not enough, in our view, to prevent the Fed from cutting interest rates in December."

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The Fed is approaching its rate-cutting campaign through the lens of its dual mandate of ensuring price stability and maximum employment, and with inflation still near its 2% target despite the October uptick and the labor market showing strength, 

"With the economic landscape underpinned by a resilient labor market, and solid consumer spending, the Fed remains concerned about lower wage earners still struggling with higher interest rates, and small businesses coping with higher prices and bank loans," said Quincy Crosby, chief global strategist for LPL Financial. "The last mile towards price stability has been stymied by still ‘sticky’ inflation and bumps along the road."