Consumer Spending. WASHINGTON (AP) – As the presidential race, deeply influenced by Americans’ frustration with high prices, nears its end, the government reported on Thursday that an inflation gauge closely monitored by the Federal Reserve has dropped to levels close to those before the pandemic. The Commerce Department stated that prices rose just 2.1% in September compared to a year earlier, down from a 2.3% increase in August. This is barely above the Fed’s 2% inflation target and in line with readings from 2018, well before prices started surging after the pandemic recession. However, some signs of inflationary pressures still remain. Excluding volatile food and energy costs, so-called core prices increased 2.7% in September from a year earlier for the third consecutive month. On a monthly basis, core prices rose 0.3% from August to September, up from 0.
The inflation gauge closely watched by the Fed falls to the lowest level since early 2021. From July to August, it is 2%. The increase in the core rate is higher than what the Fed would prefer. However, for the past six months, core inflation has declined to a 2.3% annual rate, down from 2.5% in August. Economists still expect the Fed to cut its key rate by a quarter-point when it meets next week. “It’s essentially the soft landing that many of us dreamed of,” said Gregory Daco, chief economist at the tax and accounting firm EY, referring to a scenario in which high interest rates manage to tame inflation without causing a recession. “You really have the best of both worlds, with consumer spending growth remaining resilient and inflation moving within striking distance of the Fed’s 2% target.” A separate measure of worker pay that the government issued Thursday — the employment cost index — showed that wages and benefits grew just 0.
In the July-September quarter, the inflation gauge closely watched by the Fed fell to 8%, the slowest pace in three years when measured from the same quarter a year earlier. Workers’ paychecks, excluding government employees, rose 3.8%, a pace consistent with the Fed’s inflation target, as Daco said. Although faster wage growth benefits workers, it can also cause inflation if companies raise prices to pass on higher labor costs to consumers. Overall, the latest signs of sustained inflation cooling come five days before an election where many voters are dissatisfied with the economy as average prices are nearly 20% higher than four years ago. Former President Donald Trump has mainly blamed the Biden-Harris administration’s energy policies and promised that inflation would ‘vanish completely’ if he is elected.
The Federal Reserve’s closely watched inflation gauge has fallen to its lowest level since early 2021. This development is set against a backdrop of policy debates, with Vice President Kamala Harris pledging to prohibit price gouging on groceries and to alleviate the costs of childcare and healthcare. Conversely, economists argue that Trump’s policies, particularly his plans for extensive new tariffs and mass deportations, could exacerbate inflation.
Experts have indicated that Harris’ proposals regarding price gouging are unlikely to have a significant short-term impact. Despite these economic discussions, consumer confidence remains robust, as evidenced by a 0.5% increase in spending from August to September. This surge in spending has contributed to a healthy economic expansion during the July-September quarter. However, income growth was more subdued last month, with a mere 0.3% increase, as reported by the government. In reaction, Americans have reduced their savings, resulting in a savings rate of 4.6%, down from the previous 4.0%.The personal consumption expenditures price index (PCE), closely watched by the Federal Reserve, has fallen to its lowest level since early 2021. Previously at 8%, prices rose by 0.2% from August to September, a slight increase from the 0.1% rise observed from July to August.
Inflation peaked at 7.1% in June 2022, following the economy’s rapid recovery from the pandemic recession amidst severe shortages of parts and labor. The PCE index, released on Thursday, is favored by the Fed over the consumer price index due to its ability to account for changes in consumer shopping behavior during periods of inflation.
Over the past two years, inflation has steadily cooled after supply chains recovered from pandemic disruptions and the Fed increased its key interest rate to a four-decade high, which in turn depressed home sales and auto purchases.
The Federal Reserve’s closely watched inflation gauge, the Personal Consumption Expenditures (PCE) index, has fallen to its lowest level since early 2021. This index is significant as it can capture consumer behavior shifts, such as switching from more expensive national brands to more affordable store brands.
Generally, the PCE index indicates a lower inflation rate compared to the Consumer Price Index (CPI). This difference is partly due to the fact that rents, which have been high, have double the weight in the CPI compared to the PCE index.
Federal Reserve Chair Jerome Powell indicated in late August that the Fed is increasingly confident that inflation is coming under control. This confidence was bolstered by weakened hiring in July and August, leading the Fed to cut its key rate by a significant half-point last month.
With inflation continuing to slow, the Fed is anticipated to further reduce its rate by a quarter-point in November and likely by another quarter-point in December. However, the future of rate cuts remains uncertain. The hiring situation rebounded sharply in September, and the unemployment rate dropped to a low of 4%.
The Federal Reserve’s closely monitored inflation gauge has fallen to its lowest level since early 2021, recording a 1% decrease. This decline is indicative of a potentially stronger job market than previously thought during the summer months.
Retail sales have also experienced an uptick in the previous month, suggesting a positive trend in consumer spending. Additionally, the government’s recent estimate indicates that the economy grew at a robust 2.8% annual rate during the third quarter of the year, from July to September. This growth was primarily driven by strong consumer spending. The positive economic indicators have led to speculation that the Fed might consider skipping a rate reduction in December or adopt a more gradual approach to cutting rates in the following year. On the horizon, the government is set to release its final major economic data before the presidential election: the October jobs report. This report is expected to present a more complex picture of the labor market than usual, as Hurricanes Helene and Milton are believed to have caused tens of thousands of workers to lose their jobs, albeit temporarily.
