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The Key Takeaways
- The report is due on Wednesday. Forecasts indicate that inflation, as measured by Personal Consumer Expenditures (PCE), will likely accelerate in October.
- The housing market has helped to keep overall inflation high, even as other items have returned to their pre-pandemic levels.
- Financial markets anticipate a December rate reduction. Stubborn inflation may force the Federal Reserve into holding interest rates at higher levels for longer.
The Federal Reserve's preferred measure of inflation likely stayed too hot for comfort in October, though possibly not hot enough to derail the central bank's expected move to cut interest rates again in December, according to forecasts.
According to Dow Jones Newswires’ and The Wall Street Journal’s survey of economists, forecasters believe that a Bureau of Economic Analysis (BEA) report due out Wednesday will show a 2.3% increase in the Personal Consumption Spending for October compared to last year. This would represent an increase from the 2.1% in September.
Forecasts suggest that the Consumer Price Index (CPI) also indicated an increase in inflation for October on a yearly basis.
“Core” The inflation rate, excluding volatile food and energy prices, should have increased by 2.8% in the past year. This is an increase from September’s 2.7%. Core inflation is closely monitored by economists and policymakers because energy and food prices are volatile and can change for reasons that have nothing to do with broader inflation trends.
The impact of a stubborn inflation on interest rates
An uptick would push the inflation rate from the Fed's 2% annual goal. This could affect monetary policy as well as interest rates, since central banks pay more attention to PCE rather than other measures of inflation.
The Fed cut interest rates from a two-decade high in September and followed up with another cut in November. Rates are high compared to historical averages. This keeps the borrowing cost for all types of credit including auto loans and credit cards elevated.
Fed officials held rates high in order to curb the rise of inflation as 2022’s economy started recovering from pandemic. Fed officials became confident in their ability to control inflation after the rate of it fell steadily this year. Cuts are intended to stimulate borrowing and expenditure and to help the economy grow to stop job loss.
The job market is also resilient. Fed Chair Jerome Powell and other officials have said that they do not want to cut more.
On Monday, financial market participants were pricing in a 53% chance the Fed would cut its rate by 0.25 percentage points in December, taking it to a range of 4.25% to 4.5%, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
Housing is one of the major reasons for inflation to remain high.
Housing costs are increasing, which has a direct impact on the inflation rate. Shelter is an important factor that affects the cost of life and most households budgets.
In future reports, economists anticipate a tamer increase in housing costs. The government’s data, they predict, will reflect the deceleration of home price rises that has been documented by other measures in recent years.
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