In the broader U.S. Personal Consumption Expenditures (PCE) Price Index, inflation rose 2.8% in September, right in line with analysts’ expectations. This graphic illustrates the YoY and MoM inflation rate. The 0.3% increase on a monthly basis indicates ongoing stability. That is exactly the same increase as we experienced in August, and it is exactly what economists estimated as well.
Inflation, whether transitory or not, has been a key driver in impacting economic policy as well as consumer and investor sentiment. Economists and policymakers are justifiably told to look at the core inflation rate. This rate does not include the higher and more volatile prices of food and energy. Central banks often have an official target of about 2%. They feel this level creates the necessary economic stability and conditions to truly boost growth.
Understanding Core Inflation
Core inflation is a key measure, and one that might be considered the best gauge of an economy’s long-term direction. It’s the one number that central banks have now put under a microscope in terms of making interest rate policy decisions. When core inflation is obviously above the 2% inflation target, policymakers act swiftly. They typically do this by increasing interest rates to push down consumer spending and bring down inflation. On the flip side, once core inflation goes below this barrier, the obligation for central banks is to reduce interest rates to revive economic activity.
The current PCE Price Index data indicates that core inflation remains a concern for regulators as they navigate monetary policy. The jump in the index illustrates the continued persistence of inflationary pressures that may affect future interest rate increases.
Monthly Trends in the PCE Price Index
The new report out from the Bureau of Economic Analysis is full of good news. The PCE Price Index rose 0.3% from August to September, on a month-over-month, not seasonally adjusted basis. This new increase not only meets analysts’ expectations but exceeds this percentage rate of change reported for August. This kind of consistency in month-to-month increases indicates a more stable outlook for overall consumer prices, and that’s extremely important when making long-term economic predictions.
For reference, economists often report inflation as a percent change on both a MoM and YoY basis. The PCE Price Index skyrocketed by 2.8% just since last year. This translates to consumers paying more now than they were right about now a year ago. This continued increase is concerning for consumer purchasing power and the state of the economy at large.
Implications for Monetary Policy
The immediate implications of the July PCE PI data are important for monetary policy. As core CPI trends influence decisions made by the Federal Reserve, understanding these figures becomes paramount for stakeholders in financial markets. The close monitoring of inflation rates helps inform decisions regarding interest rates, which can subsequently affect borrowing costs and economic growth.
First, when core CPI consistently runs near or above the 2% target, signals that inflationary pressures are likely to be more persistent. This can put pressure on central banks to start tightening monetary policy to avert a possible boom in the economy. Time will tell, but a dip in inflation below this benchmark would likely spurn a more accommodative stance. This new strategy, focused on placemaking, is intended to increase economic development.