Key inflation measure drops ahead of Fed’s last meeting of the year

The Federal Reserve’s preferred measure of inflation fell to its lowest level in more than two-and-a-half years, taking more pressure off the central bank to make another quarter-point rate hike before the year is out.

The personal consumption expenditures (PCE) price index held steady on the month and fell to a 3-percent annual increase in October, down from 3.4-percent increases in the previous three months. That’s the lowest number since March 2021.

Personal incomes rose 0.2 percent on the month, down from 0.4 percent in September and 0.5 in October.

Markets, which have already started to price in rate cuts for next year, expect the Fed to hold rates steady at the next meeting of its rate-setting committee Dec. 12-13.

There’s a 96-percent chance the Fed will keep rates within their current range of 5.25 percent to 5.5 percent, according to a prediction algorithm by financial data company CME. That’s despite the Fed’s last official projection from September, which calls for an additional quarter-point rate hike for this year.

The “core” PCE — which removes the categories of food and energy that are subject to geopolitical pressures — fell to a 3.5-percent annual increase in October, down from 3.7 percent in September and 3.8 percent in August.

Both the core and the headline PCE numbers are now below where the Fed expected them to be at end of the year, according to the central bank’s latest summary of projections.

The drop in price acceleration is mirrored in the Labor Department’s consumer price index (CPI), which also held steady in October for a 3.2-percent annual increase.

The CPI showed food prices are 3.3 percent higher than they were a year ago, while energy prices are 4.5 percent lower.

While the pace of inflation is slowing, the overall level of prices is still considerably higher than it was prior to the pandemic, averaging about a 20-percent increase since the beginning of 2020.

This has potentially contributed to low approval ratings for President Biden’s handling of the economy, despite a consistently strong labor market.

Fed bankers are sounding assured about the path of inflation.

“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent,” Fed board member Christopher Waller said in a speech delivered Tuesday.

“I am encouraged by what we have learned in the past few weeks, something appears to be giving, and it’s the pace of the economy. Data for October indicated an easing in economic activity, and forecasts for the fourth quarter show the kind of moderation that is more in keeping with progress on lowering inflation,” he said.