Lower-than-expected US core PCE rise a “small reprieve”

Summary: US Fed’sfavoured inflation measure increases by 0.2% in September; slightly lower than market expectations; annual rate steady at 3.6%; “small reprieve” ahead of expected wave of price pressures; Treasury bond yields up at front of curve, down elsewhere.

One of the US Fed’s favoured measures of inflation is the change in the core personal consumption expenditures (PCE) price index. After hitting the Fed’s target at the time of 2.0% in mid-2018, the annual rate then hovered in a range between 1.8% and 2.0% before it eased back to a range between 1.5% and 1.8% through 2019. It then plummeted below 1.0% in April 2020 before rising back to around 1.5% in the September quarter of that year. It has since spiked up above 3% in this year’s June and September quarters.

The latest figures have now been published by the Bureau of Economic Analysis as part of the September personal income and expenditures report. Core PCE prices rose by 0.2% over the month, slightly lower than the 0.3% increase which had been generally expected figure and August’s 0.3% increase. On a 12-month basis, the core PCE inflation rate remained unchanged at 3.6% for a fourth consecutive month.

“This is a small reprieve ahead of what is expected to be a new wave of price pressures, with used cars, hotel rooms and airline tickets prices all seen rising over the last few months of the year, “said NAB currency strategist Rodrigo Catril.

US Treasury bond yields rose at the front of the curve but fell elsewhere on the day. By the close of business, the 2-year Treasury bond yield had added 2bps to 0.50%, the 10-year yield had shed 2bps to 1.56% while the 30-year yield finished 5bps lower at 1.93%.

The core version of PCE strips out energy and food components, which are volatile from month to month, in an attempt to identify the prevailing trend. It is not the only measure of inflation used by the Fed; it also tracks the Consumer Price Index (CPI) and the Producer Price Index (PPI) from the Department of Labor. However, it is the one measure which is most often referred to in FOMC minutes.

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