Inflation held steady at 3.4% for the year ending in September, as measured by the consumption expenditures price index, the gauge favored by the Federal Reserve.
The numbers reported Friday morning by the Bureau of Economic Analysis were in line with expectations and showed no increase in the inflation rate after August’s numbers were revised down. The report is good news for the Fed as it works to vanquish inflation by hiking interest rates.
ECONOMIC GROWTH SURGED IN THIRD QUARTER TO 4.9% RATE DESPITE HIGH INTEREST RATES
Nevertheless, inflation is running above the Fed’s goal of 2% annual price growth. But the report (especially the fact that inflation didn’t rise again) shows that some progress is being made. It is a welcome development for the Biden administration, which has worked to tout positive economic developments, such as low unemployment and strong economic growth, as evidence that the “Bidenomics” agenda is working.
Core PCE inflation, a measure of inflation that strips out volatile energy and food prices, fell to a 3.7% year-over-year rate.
“While there isn’t an expectation for a rate increase at next week’s Fed meeting, the [Fed] will acknowledge the underlying strength of the economy given a still resilient labor market, they may find it appropriate to suggest that financial conditions are still not tight enough quell consumer spending,” said Quincy Krosby, the chief global strategist for LPL Financial. “The Fed must be pleased with today’s report as core inflation hasn’t jumped above consensus estimates — certainly, markets are indicating a positive open.”
While PCE is the Fed’s preferred inflation gauge, the more commonly cited headline number is the consumer price index. Inflation was clocking in at 3.7% in September, according to the CPI.
Inflation has fallen dramatically from its peak of over 9% in the summer of 2022 as the central bank hikes rates. But despite the Fed’s historically restrictive monetary policy, other economic indicators have held up surprisingly well. For instance, gross domestic product growth has remained positive (and even accelerated) despite the fact that rate hikes are meant to slow commerce.
Indeed, the latest GDP report out this week came in hotter than anticipated.
Economic growth accelerated to a strong 4.9% seasonally adjusted annual rate in the third quarter of this year, up from 2.1% the quarter before, according to the report that came out on Thursday.
The labor market, while showing a few signs of softening, is also humming right along and exceeding expectations, notching another 336,000 jobs in September. Additionally, employment gains in July and August were also revised upward by a combined 119,000.
The robust GDP growth and underlying strength in the labor market give the Fed more leeway in its tightening agenda, although economists expect that GDP growth will begin to slow and the labor market will weaken as the central bank continues to hold interest rates at multidecade highs.
“Comerica forecasts for real GDP growth to slow to 0.7% annualized in the fourth quarter, and grow just 0.5% annualized in the first quarter — a meaningful slow patch after the third quarter’s surge,” said Bill Adams, the chief economist for Comerica Bank. “The Fed will see the third quarter’s surge in GDP as evidence that the economy is robust and that restrictive interest rates continue to be appropriate near-term.”
Most investors now think that the Fed will avoid raising interest rates again before the end of the year. Fed officials are taking a wait-and-see approach to future tightening, although Fed Chairman Jerome Powell recently signaled that the Fed wouldn’t raise rates at its next meeting later this month.
The general consensus among Fed watchers is that while the central bank is more likely than not done with its rate hikes, it will likely keep interest rates at their high level for longer than previously expected.
The higher rates, while not yet pulling down GDP growth and the labor market, have caused pain for consumers.
One of the things most affected has been the housing market. Mortgage rates have soared to multidecade highs in response to the Fed’s restrictive monetary policy.
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As of Thursday, the average rate on a 30-year, fixed-rate mortgage was 7.9%, according to Mortgage News Daily, which tracks daily changes in rates. Last week, mortgage rates peaked at 8.02%. The last time rates passed 8% was in 2000, according to separate records maintained by Freddie Mac.
In addition to making home purchases more expensive, the Fed’s tight monetary policy has also made interest-rate-sensitive things, such as paying off credit card debt, more burdensome.
