Latest PCE stats show an increase in October from the previous month
The Federal Reserve’s preferred measure of core inflation increased its pace in October compared to the previous month, but how will that inform the central bank’s rate decision in December?
New stats published Wednesday by the US Department of Commerce’s Bureau of Economic Analysis shows that its index of personal consumption expenditures rose 2.3% year-over-year, rising from September’s 2.1% annual rate, although this was in line with the Dow Jones consensus forecast.
On a monthly basis, the PCE was up 0.2%, although without food (for which prices were up less than 0.1%) and energy (prices decreased 0.1%) the PCE gain was up 0.3%. Services were the key driver of the rise (+0.4%) while goods went the other way (-0.1%).
The report also revealed that US consumers’ disposable income increased 0.7% or US$144.1 billion.
Looking at CME FedWatch, which tracks the probability of changes to the Fed’s target rate based on rate traders activities, there is a 66% chance of a cut at the next meeting of the FOMC on December 18. This is up from less than 56% a week ago but below the near-75% chance seen a month ago. The tracker also shows a 33% chance of a pause on rate cuts and a zero chance of a hike.
Greg Wilensky, head of US Fixed Income at Janus Henderson Investors, agrees that a Fed rate cut is still highly likely next month.
“While this month's core PCE inflation data was certainly a little higher than the Fed would like it to be, it was very much in line with their and the market's expectations given the CPI and PPI data we got earlier this month,” he said. “Given the broad consensus-like reading across the slew of economic data releases today, we do not see any meaningful impact on the Fed's upcoming rate decision in December.”
Wilensky and his team are expecting a cut of 25bps in December and feel that this is higher than 70%.
“In our view, it will take a combination of a very strong NFP print and a higher-than-expected core CPI release to cause a pause at the December meeting,” he added, noting that more cuts are expected in 2025 although the pace is difficult to forecast with certainty.
