PCE Soars To Four-Month High - The Mortgage Note

The Fed’s preferred inflation measure soared to a four-month high in September, increasing the likelihood of future Fed rate hikes.

The personal consumption expenditures price index tracks what Americans buy and for how much, offering a view into their spending habits. The core index, which excludes food and energy components, increased by 0.3% in September.

When adjusted for inflation, consumer spending rose 0.4%.

The data comes on the heels of news that the economy grew by 4.9% in Q3 2023, the fastest pace in two years and more than expected. Consumers once again waved off recession fears, but the increase puts the Central Bank in a tough position as it battles inflation.

Analysts generally maintain that another increase won’t come at the next FOMC meeting, scheduled for November 1. But Federal Reserve Chairman Jerome Powell has doubled down on the government’s commitment to a 2% inflation rate in recent comments, and traders have not ruled out the possibility of a December hike.

“Overall, there is probably not enough in [recent inflation data] alone to suggest to the FOMC that it needs to be tightening policy again in November, but it will see it as justifying its message that policy needs to remain ‘tighter for longer,’ with the prospect of another rate rise still being kept on the table,” Stuart Cole, chief macroeconomist at Equiti Capital, told Reuters.

Fannie Mae economists still believe a mild recession is on the way in early 2024, and Q4 data may pave its way. The United Auto Workers strikes and student loan repayment going back into effect could slow growth through year-end.

“Personal consumption has not only remained resilient, but recent official data revisions indicate that the consumer has been in a better position than previously thought, increasing the likelihood of an economic ‘soft landing,’” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.

“However, despite consumer resiliency, the recent rise in interest rates has been precipitous, and in past environments – even with less severe interest rate shocks – this has led to economic dislocations. As such, we still expect to see a mild economic downturn in the first half of 2024.”