Inflation trends likely to keep Fed rate-hike pause on track
Summary
Forecasters estimate that prices picked up last month, but not enough to prompt the central bank to raise interest rates next week.
The Federal Reserve’s favorite inflation measure is estimated to show that price pressures picked up modestly last month amid a surge in economic growth, a strong labor market and a consumer spending splurge.
Moderately higher inflation in September would keep Fed officials on track to hold interest rates steady at its Oct. 31-Nov. 1 policy meeting. They are closely watching underlying price trends to gauge whether they have raised short-term interest rates enough to slow the economy and tame inflation.
Economists surveyed by The Wall Street Journal estimate the Commerce Department’s core personal-consumption expenditures price index, which excludes volatile food and energy prices, increased a modest 0.3% in September from the prior month, after a 0.1% rise in August. From a year earlier, they estimate prices rose 3.7% last month, compared with 3.9% in August and 5.6% in February 2022, which was a recent peak.
Underlying inflation remains elevated but has cooled significantly as the Fed over the past 20 months has raised interest rates at the fastest pace in four decades. A separate Commerce Department report on Thursday showed core prices rose an annualized 2.4% in the third quarter, only modestly above the Fed’s 2% inflation target.
The Fed last raised rates in July, lifting its benchmark federal-funds rate to a range between 5.25% and 5.5%, a 22-year high. A recent run-up in long-term Treasury yields could allow the central bank to stop raising short-term rates so long as inflation continues to decline.
The Commerce Department will release the September inflation figures, along with household income, spending and saving data, at 8:30 a.m. Eastern time Friday.
Has recent inflation progress stalled?
Inflation is well below the 40-year peak reached last year. That cooling progress recently stalled, however, indicating the Fed can’t yet declare victory.
But Fed Chair Jerome Powell and other Fed officials have signaled they will likely hold rates steady when they meet next week. Officials want to watch how the economy responds to their past hikes in short-term rates and to elevated long-term Treasury yields.
“It may just be that rates haven’t been high enough for long enough," Powell said in a speech last week.
Increases in longer-term interest rates can boost borrowing costs such as for mortgages, auto loans and business debt, all of which could slow economic growth.
“The Fed can comfortably stay on hold," said RSM chief economist Joseph Brusuelas.
Will consumers fuel inflation?
Friday’s report will also show how much Americans boosted their spending last month. Consumer spending, the main driver of economic growth, has been robust much of this year. Gross domestic product grew at a seasonally and inflation-adjusted 4.9% annual rate in the third quarter, the Commerce Department said Thursday, the fastest pace in nearly two years. Consumer spending rose at a 4% annual pace July through September.
Strong consumer spending on both goods and services helped power the growth that—if it continues—could fuel inflation and warrant still-tighter monetary policy in the months ahead.
The Fed “remains concerned that economic growth is too strong in 2023, creating inflationary pressures in the labor market," PNC Chief Economist Gus Faucher said.
The economy faces potential hurdles in the months ahead, however, that could trip up growth, including higher long-term interest rates, wars in Ukraine and the Middle East and the chance of a partial government shutdown.
Fed officials will see two more months of inflation readings before their final policy meeting of the year on Dec. 12-13.
Write to Harriet Torry at harriet.torry@wsj.com
