The latest inflation readings do seem to be bringing the US federal reserve one step closer to hitting its cherished aim of a 2% inflation rate. The latest consumer and producer price indexes for September matched up to expectations in line with what will herald further trends toward inflation being low. Just weeks after cutting interest rates drastically, this seems like the right push for the Federal Reserve.
According to economists at Goldman Sachs, the Commerce Department’s personal consumption expenditures price index for September will report a 12-month inflation rate of about 2.04%, which, if accurate, would round down to 2%. That is more than two years since inflation spiked to a 40-year high. The Fed took aggressive rate hikes based on this inflation rate, although it traditionally uses the PCE as its inflation gauge, while it considers all indicators for its decision-making.
Chicago Fed President Austan Goolsbee liked the trend, commenting in an interview with CNBC, observing, “inflation has decreased noticeably over the past 12 to 18 months and that the job market is stabilizing at full employment levels.” He said he wanted both inflation and employment measures to stay in this situation.
Despite these encouraging signs, there are a few caveats. The all-items consumer price index rose 2.4% year over year in September, while the producer price index-the leading indicator of wholesale inflation-was at 1.8%. Goldman’s estimate is consistent with data from the Cleveland Fed, which estimates that the headline PCE rate was 2.06% in September.
However, the core rate, which excludes food and energy, is expected to be 2.6% for the PCE and 3.3% for the consumer price index, meaning there might be sustained pressures to inflation. The Fed officials pointed to elevated levels of core inflation, as well as shelter costs, citing those as temporary factors that could temper going forward as rental trends normalize.
Now with a recent easing of inflation, a basis for the Fed to consider further rate cuts arises, especially because market speculations that a quarter-point cut might be done both at November and December meetings come into play. However, analysts are placing cautionary notes that extensive easing may boost the consumer demand inadvertently, thus aggravating the building inflationary tendencies in the economy.
