The Federal Reserve's preferred inflation gauge, the PCE price index, is due Wednesday and is expected to show core prices still running at 3.3% annually — unchanged from July and well above the Fed's 2% target. Two Fed officials said Tuesday they still expect another rate hike before year-end, while consumer spending keeps climbing despite the persistent price pressure.
Economists expect Wednesday's personal consumption expenditures price index to rise 0.3% at both the all-items and core levels, according to the Dow Jones consensus. On an annual basis, the all-items and core readings are expected to hold at 3.7% and 3.3%, unchanged from July and still well above the Fed's 2% target.
Dan North, senior economist at Allianz Trade, said core inflation isn't moving toward the Fed's goal. According to CNBC: "It's still way above target", North said, adding that the Fed cannot ignore or explain the reading away.
Officials still lean toward another hike
Federal Reserve officials approved a quarter percentage point rate increase in September and penciled in another move before year-end. All but two of the 18 Federal Open Market Committee officials who submitted forecasts expect at least one more increase in 2026.
Fed Governor Michael Barr said Tuesday that tariffs and the war with Iran have knocked the central bank off course on its progress toward the 2% goal, and that he does not yet see a clear trend toward a timely return to target. Barr reiterated that the Fed likely will need to keep raising rates; the September move put the benchmark range at 3.75%-4%.
New York Fed President John Williams pointed to a third driver of persistent inflation: the artificial intelligence buildout and the associated demand for related goods. He struck a more dovish tone than Barr, saying there is no need for urgency, though he still expects one further rate increase may be necessary this year.
Spending holds up despite the price pressure
Wednesday's release also carries a methodology revision: the Bureau of Economic Analysis is adjusting how it measures prices for legal services, software and computer accessories, and portfolio management services back to 2021. Wall Street estimates suggest the change could take July's 12-month PCE reading down to 3%, two or three tenths of a percentage point lower than previously reported.
Consumer spending is still climbing even so. The Street consensus points to a 0.8% rise in August spending, up from 0.2% in July, driven in part by another surge in gas prices. Bank of America reported that debt and credit card spending rose 6.9% from a year earlier for the week ended Sept. 19, including a 26.5% jump in gasoline purchases; spending still rose 5.7% with gas excluded.
For the Fed, persistent inflation alongside resilient consumer spending offers little reason to conclude September's hike was enough. Markets are pricing in a strong probability of an October rate hike, with another to follow in either December or January.
Source: CNBC
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