The monthly increases for inflation in October as measured by the Personal Consumption Expenditure (PCE) price index came in exactly as the market expected – up by 0.2 percent for the overall index and by 0.3 percent for the core (removing the volatile food and energy components) index. These increases were identical to the increases seen in September, but unlike in the prior month the 12-month trend rates moved higher – climbing to an increase of 2.3 percent overall and 2.8 percent for core.
The Fed has a long-term goal of 2.0 percent for PCE inflation, and trend rates remain close to that. But are they close enough for the Fed to continue easing monetary policy at the next FOMC (Federal Open Market Committee) meeting in December? PCE inflation is down sharply from the high reached in June 2022 (7.3 percent) and even down from a year ago (3.0 percent). Still, the October measures moved in the wrong direction. Annualized growth rates over shorter periods show a better story, with the 3-month annualized rate at 2.2 percent and the 6-month annualized rate at 1.6 percent – perhaps allowing the FOMC to concentrate on those intermediate measures of inflation (rather than the 1-month and 12-month measures, which were higher). On the other hand, central tendency measures of inflation (trimmed-mean and median) have been running hotter than either the overall or core measures.
While the Fed will be looking at a broad swath of data before the December FOMC meeting concludes on December 12, three economic releases will be front and center: today’s PCE inflation figures, the November employment report (December 6), and the November CPI report (December 11). This most recent PCE report might suggest that the Fed could pause at the December meeting, but will the employment situation show a worsening in the job market? And will the CPI data show that inflation remains sticky and above the Fed’s goal?
According to the CME Group’s FedWatch measure, financial markets are pricing in a 70 percent probability of a 25 basis point easing at the December meeting, with a 30 percent probability of no change. Those probabilities will certainly change after the employment and CPI figures are released. The November employment report will show a rebound from the hurricane-induced slowdown in hiring in October (with payroll gains slipping to an increase of only 12,000), but by how much is still uncertain. The CPI inflation measures have been a bit higher than the PCE measures but tell a similar story. If the November CPI report shows no improvement in trend inflation (or a further move higher), then that suggests that the PCE inflation figures for November will move in the same direction (they will be released after the FOMC meeting, so the Fed will have to rely on the CPI for the most recent inflation information). But perhaps the CPI will show some lessening of inflation pressures – it is still too soon to give a reasonable projection.
Even with expectations moving more toward Fed easing in December, we still think it’s a close call. The employment and CPI releases will be key in determining whether there will be a December hold or a December ease.
David W. Berson, Ph.D.
Chief US Economist
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