The U.S. Commerce Department is set to release the September Personal Consumption Expenditures (PCE) Price Index, a crucial inflation measure favored by the Federal Reserve ahead of its upcoming rate decision. Recent strong economic data has bolstered market expectations of a "soft landing," yet some analysts speculate the Fed might skip a rate cut if core PCE data exceeds expectations. In August, the index rose by 2.2% year-on-year, with goods prices falling by 0.9% and services prices increasing by 3.7%, potentially aligning with the Fed's 2% inflation target this week.
UBS economist Alan Detmeister, formerly with the Fed, predicts the September PCE to be around 2.1%, citing recent declines in energy prices, especially gasoline. However, he warns against expecting consistent 2% inflation, projecting a future rebound in energy prices. Texas-based economist Belinda Román noted that while current inflation data is promising, service prices, particularly housing, have climbed nearly 4%, partly due to rising wages in a tight labor market, potentially sustaining inflation.
Former Federal Open Market Committee member Don Kohn emphasized monitoring the Employment Cost Index for wage trends as part of inflation calculations. He noted that policymakers consider detailed PCE components like services, food, and energy costs rather than overall figures alone. Detmeister stated that the Fed's credibility hinges on maintaining low and stable inflation, rather than fixating on the 2% mark, as the economy performs well with inflation between 1% and 3%.
Expectations of a Fed rate pause are gaining traction. U.S. ADP employment data showed unexpectedly rapid hiring, and recent robust economic indicators suggest that the soft landing scenario envisioned by Fed officials is nearing. Notable signals include increased retail sales, better-than-expected non-farm payrolls, upgraded long-term GDP forecasts, and steady initial jobless claims.
Wharton finance professor Jeremy Siegel recently suggested the Fed might hold rates steady at its next meeting, despite widespread belief in a November rate cut, contingent on Friday's non-farm payroll data. Deutsche Bank's report also considers a rate pause, noting that current interest rates are significantly above the neutral rate, implying room for future cuts. However, higher-than-target core PCE and a resilient labor market could prompt the Fed to reconsider rate cuts.
