Fed’s Favored Inflation Metric Ticked Up To 6-Month High In October

Topline

Core inflation climbed to a multi-month high as expected in October, according to data released Tuesday morning, as questions swirl about the sticky price increases for American consumer with the potential inflationary effects of the tariffs backed by President-elect Donald Trump ahead.

Key Facts

The Commerce Department’s personal consumption expenditures index rose 2.3% from October 2023 to last month, matching consensus economist estimates of 2.3% inflation, according to FactSet data.

The core personal consumption expenditures index, which excludes food and energy, climbed 2.8% year-over-year, also meeting forecasts of 2.8%.

Yet the 2.8% core PCE inflation is the highest rate since April for the metric, which is the Federal Reserve’s preferred measure of the U.S. inflation picture.

That’s comfortably above the 2% core PCE target maintained by the Fed.

Though the headline PCE metric is closer to 2%, it is trending slightly upwards, rising from September’s 2.1%, though it’s a noticeably down from last October’s 3%.

Surprising Fact

Though the core PCE metric is about half of its 2022 peak of 5.6%, it’s still higher than it was for all of 1994 to 2020, evidence of the yearslong price increases coming out of the depths of the COVID-19 pandemic.

Key Background

The PCE index tracks how much Americans actually spend on goods and services in a given month. It’s viewed by some economists as a more complete inflation metric than its cousin consumer price index as it accounts for consumer substitutions in the face of higher prices, while the consumer price index just tracks price changes in a predetermined basket of goods and services, with less direct insight into behavioral changes. Aside from indicating much-desired relief for Americans’ wallets, the direction of inflation is key for the broader economy as a continued downtrend in price increases will help justify lower interest rates, a growth-friendly move which would make borrowing costs less prohibitive.

What To Watch For

How the tariffs on Canadian, Chinese and Mexican goods touted by Trump will impact inflation. “We expect an escalation in tariff policy to delay the return to 2.0%,” Goldman Sachs economists led by Ronnie Walker wrote in a Sunday note to clients, referring to policymakers’ long-held goal of 2% core PCE inflation. Tariffs bump Goldman’s end of 2025 core PCE forecast from 2.1% to 2.4%, though Walker wrote “tariffs would have only a moderate and one-time effect that should not prevent inflation from continuing to fall.”

Further Reading