While the cumulative impact of inflation has significantly shaped the U.S. economy, the relative outlook appears to be steadily improving. The annual rate of price increases is inching closer to the Federal Reserve‘s target of 2%. This trend is anticipated to be illustrated prominently on Thursday when the Commerce Department unveils its inflation figures at 8:30 a.m. ET. According to Dow Jones estimates, the personal consumption expenditures (PCE) price index is projected to reflect only a modest 0.2% inflation rate for September, translating to a 2.1% increase compared to the previous year. The Federal Reserve prioritizes the PCE measure of inflation over the Labor Department’s consumer price index as it offers a more comprehensive reflection of consumer spending behavior, including adjustments for consumers purchasing less-expensive alternatives in response to rising prices. If these forecasts hold true, they could provide the Fed with additional justification to lower its benchmark interest rate during the upcoming two-day policy meeting concluding on November 7. “Another strong quarter of GDP growth alongside an inflation reading that is nearing the target will be positively received by the Fed, which is currently navigating the delicate balance between inflationary risks and labor market pressures,” remarked Citigroup economist Alice Zheng in her note on Wednesday. The Commerce Department’s recent report indicated that the real GDP for the third quarter surged at a seasonally adjusted rate of 2.8%, slightly below the 3% growth seen in Q2 and just 0.3 percentage points under the Dow Jones estimate. Within the GDP report, the PCE inflation rate for the quarter was recorded at a mere 1.5%, implying that progress is being made in the inflation battle. However, the full picture is more complex. Core inflation, which excludes the volatile food and energy sectors, has shown greater resilience, with September estimates suggesting a monthly rate of 0.3% and an annual rate of 2.6%. This persistence is primarily attributed to declining energy prices, which have helped to reduce the overall headline inflation rate. Although Federal Reserve officials have recently shifted their focus slightly away from core inflation due to the significant impact of housing costs, they still view it as a more reliable long-term indicator. The market remains heavily invested in the prospect of additional rate cuts this year, yet the Fed is likely to adopt a cautious approach. The inflation trends, when combined with robust economic growth, suggest that there may be a rationale for maintaining a higher terminal interest rate, according to Shruti Mishra, U.S. and global economist at Bank of America. “While we don’t believe that strong economic performance will prevent the Fed from implementing rate cuts this year, the argument for pausing or halting such cuts is likely to strengthen in the first quarter if Treasury rates hover around 4% and the data continues to demonstrate solid performance as it has in recent weeks.”
**Interview with Economic Analyst Dr. Jessica Liu on Upcoming Inflation Figures**
**Editor:** Good morning, Dr. Liu. Thank you for joining us today. With the Commerce Department set to unveil its inflation figures tomorrow, what are your expectations for the Personal Consumption Expenditures (PCE) price index?
**Dr. Liu:** Good morning! I’m glad to be here. Based on Dow Jones estimates, we’re looking at a modest 0.2% inflation rate for September, which would bring the annual increase to around 2.1%. This aligns closely with the Federal Reserve’s target of 2%, and if it holds, it could signal a turning point in how we approach monetary policy.
**Editor:** Interesting. How does the PCE price index differ from the Consumer Price Index (CPI), and why does the Federal Reserve prefer it?
**Dr. Liu:** The PCE index offers a broader view of consumer spending habits, including shifts to lower-priced alternatives as consumers respond to inflation. This flexibility in measuring spending makes it a valuable tool for the Fed. On the other hand, the CPI is more rigid and doesn’t account for changes in consumer behavior in response to price changes.
**Editor:** If the inflation readings meet expectations, what impact could that have on the Federal Reserve’s upcoming decisions concerning interest rates?
**Dr. Liu:** If we see a strong GDP growth alongside inflation numbers aligning closely with the Fed’s target, it would provide them with a solid justification to consider lowering the benchmark interest rate. This could help stimulate further economic growth, particularly if we’re seeing moderation in inflation.
**Editor:** And what are the risks they may face in making such a move?
**Dr. Liu:** The primary risk is navigating the delicate balance between encouraging growth and not igniting inflationary pressures again. If inflation were to accelerate unexpectedly, the Fed could face criticism for moving too soon on rate cuts. There’s always a careful dance between stimulating the economy and maintaining price stability.
**Editor:** Thank you, Dr. Liu, for sharing your insights. We’ll be watching the inflation report closely and its potential implications for the Fed’s policies.
**Dr. Liu:** Thank you for having me. It will certainly be an important development for both the economy and consumers.
