Progress in controlling inflation decelerated in October, but futures market investors anticipate a higher likelihood of another Federal Reserve rate cut in the upcoming month.
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Progress in taming inflation slowed in October, but not to the extent that investors think a December Fed rate cut is off the table.
The Federal Reserve’s preferred measure of inflation showed annual growth in the price of goods and services moved away from the central bank’s 2 percent target in October.
At 2.3 percent, annual growth in the Personal Consumption Expenditures (PCE) price index was up from 2.1 percent in October, the Bureau of Economic Analysis reported Wednesday.
But bond market investors took the news in stride, as month-over-month inflation readings stayed in line with forecasts.
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Yields on 10-year Treasury notes, a barometer for mortgage rates, dropped 6 basis points Wednesday, and futures markets tracked by the CME FedWatch tool show investors think the odds of a Dec. 18 rate cut have improved to 66 percent, up from 59 percent on Tuesday.
Uptick in annual inflation
Annual Core PCE, which excludes the cost of food and energy, rose to 2.8 percent in October, up from 2.7 percent in September and the highest reading since April.
The 0.2 percent and 0.3 percent month-over-month increases in the PCE and core PCE indexes were in line with forecasters’ expectations.
Samuel Tombs
The “hefty” increase in core PCE was driven by big increases in some volatile components including used auto prices and airline fares, Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs said, in a note to clients.
“Price pressures remained muted outside of these volatile sectors in October,” Tombs said, and other forward-looking indicators such as the jobs quits rate and a survey showing fewer businesses intend to raise prices “suggest that underlying services inflation will decline over the coming months.”
Forecasters at Pantheon Macroeconomics continue to think that the November PCE numbers will give the Fed “confidence to reduce the funds rate at a third straight meeting” next month, Tombs said.
The Bureau of Economic Analysis on Wednesday also released its second estimate of Q3 2024 gross domestic product (GDP), confirming an initial estimate that the economy grew at a healthy annual rate of 2.8 percent, down from 3.0 percent in Q2.
Healthy economic growth
While the economy slipped into negative growth in Q1 2022, stock market indexes continue to break records as investors gain confidence that the Fed can pull off a soft landing and avoid a recession, commonly defined as two consecutive quarters of negative growth.
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