Fed weighs how much to cut rates as the PCE index moves away from Fed’s 2% inflation goal.
The numbers: The rate of inflation rose in October and moved further away from the Federal Reserve’s 2% goal, confirming a recent uptick in prices that could cajole the central bank into cutting interest rates less aggressively.
The Fed’s preferred personal-consumption expenditures price index climbed 0.2% last month for the second month in a row, the government reported Wednesday.
The 12-month rate of inflation edged up to 2.3% from 2.1%, leaving it shy of the Fed’s 2% goal. The rate of inflation is likely continue to move higher until the end of the year, economists predict.
Key details: The more critical core rate of inflation, which omits food and energy, rose 0.3% last month.
The 12-month core rate moved up to 2.8% from 2.7% to mark the first increase since June. The Fed views the core rate as a more accurate measure and a better predictor of future inflation.
The elevated core rate has forced senior Fed officials to consider whether to cut interest more slowly, a summary of their last big meeting in November showed.
Fed officials are also unsure what the so-called neutral rate of interest is, raising questions about how much they should reduce the bank’s benchmark short-term rate.
The Fed’s benchmark rate would be considered neutral if it neither spurred the economy to expand faster nor depressed the rate of growth.
Looking ahead: The Fed won’t determine its next step until it sees the latest reports on inflation and employment in early December.
In the meantime, consumers looking for relief when buying a home or car are going to have to wait. U.S. interest rates are not expected to decline as quickly as Wall Street had hoped just a few months ago.
Investors still think a rate cut is likely in December, with a pause possibly to follow in January.
Looking ahead: The report “still leaves the Fed on track for a quarter point cut in December, but with the three-month annualized change in core PCE prices at 2.8%, the accompanying message will likely be one of caution about how much easing is to come thereafter,” said economist Katherine Judge of CIBC Economics in a note to clients.
