The Fed’s inflation monitor just fell to its lowest level since the pandemic

Department of Commerce reported that prices rose just 2.1 percent in September from a year earlier, down from a 2.3 percent increase in August. That’s just above the Fed’s 2 percent inflation target and in line with readings in 2018, well before prices started to rise after the pandemic recession.

However, some signs of inflationary pressures remained. Excluding volatile food and energy costs, so-called core prices rose 2.7 percent 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 0.2% from July to August. The base rate hike is higher than the Fed would prefer.

Still, over the past six months, core inflation has eased to an annual rate of 2.3 percent, down from 2.5 percent in August. And 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 have been dreaming of,” said Gregory Daco, chief economist at the accounting and tax firm. EYreferring to a scenario where 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 employee pay that the government released on Thursday – labor cost index — showed that wages and benefits rose just 0.8 percent in the July-September quarter, the slowest such pace in three years. Compared to the same quarter last year, workers’ wages, excluding government employees, rose 3.8 percent, a pace in line with the Fed’s inflation target, Daco said.

While faster wage growth provides a boost for workers, it can also fuel inflation if companies pass on their higher labor costs to consumers through higher prices.

Taken as a whole, the latest signs of a sustained cooling in inflation come five days before an election in which many voters are bullish on the economy, especially as average prices remain nearly 20 percent higher than they were four years ago. Former President Donald Trump largely blamed the energy policies of the Biden-Harris administration and promised that inflation would ” disappear completely ” if chosen. Vice President Kamala Harris has promised to ban food price hikes and lower child care and health care costs.

Economists say Trump’s policies would actually worsening inflationmainly because of his plans to impose major new tariffs and begin mass deportations of migrants and other immigrants. Harris’ proposals to raise prices, experts said, would have little impact in the short term.

Thursday’s report also showed Americans remain confident enough in their finances to continue shopping: Spending rose 0.5 percent from August to September, helping the economy expand. at a healthy clip in the July-September quarter.

Income grew more slowly last month, the government said, rising just 0.3 percent. In response, Americans reduced their savings, leaving the savings rate at 4.6 percent, down from 4.8 percent the previous month.

On a monthly basis, prices rose 0.2% from August to September, up slightly from a 0.1% increase from July to August.

Inflation peaked at 7.1 percent in June 2022 as the economy emerged from the pandemic recession at a time of severe parts and labor shortages, according to the gauge released Thursday, called the personal consumption expenditure price index. Inflation has cooled steadily over the past two years as supply chains recovered from pandemic disruptions and the Fed raised its key interest rate to a four-decade high, slowing home sales and car purchases.

The Fed tends to favor the inflation gauge the government released on Thursday — the price index for personal consumption expenditures — over the more widely known consumer price index. The PCE index tries to account for changes in the way people shop when inflation rises. It can surprise, for example, when consumers switch from more expensive national brands to cheaper store brands.

In general, the PCE index tends to show a lower inflation rate than the CPI. In part, that’s because rents, which have been high, account for twice as much in the CPI as the index released on Friday.

The Jerome Powell Chair reported at the end of August that the Fed is increasingly confident that inflation is under control. And employment weakened in July and August. These trends led the Fed to reduce the key rate by half a point last month. As inflation continues to ease, the Fed is expected to cut rates further by a quarter point in November and likely by another quarter point in December.

However, the prospects for future interest rate cuts are not quite clear. Hiring rebounded sharply in September and the unemployment rate fell to a low of 4.1 percent, evidence that the labor market may be stronger than it appeared last summer. Retail sales also rose last month. And on Wednesday, the government estimated that the economy expanded to a Annual rate of 2.8%. in the July-September quarter, a solid pace, fueled by strong consumer spending.

The upbeat economic data sparked some speculation that the Fed may decide to skip a rate cut in December or cut rates more slowly next year.

On Friday, the government will release its last major economic data before the presidential election: the October jobs report. It is likely to offer one more confused picture than usual in the labor market, as hurricanes Helene and Milton are believed to have caused tens of thousands of workers to lose their jobs, at least temporarily.