RALEIGH – The Federal Reserve’s preferred inflation measure cooled last month, the latest sign that price pressures are waning in the face of high interest rates and moderating economic growth. And that’s good news, says N.C. State economist Dr. Mike Walden.
“The Federal Reserve’s preferred measure of inflation – the personal consumption expenditure deflator (PCE deflator) – showed moderating consumer price increases in October compared to September,” Walden tells WRAL. ” Year-over-year, the PCE deflator rose 3% in October compared to 3.4% in September. The Fed prefers this inflation measure because it more directly reflects what consumers are currently buying, as compared to the Consumer Price Index (CPI).”
So what’s this news mean?
“I expect the Fed will be pleased with this result, and it will add more motivation for the Fed to not raise interest rates further in the near future,” Walden explains. “Indeed, my forecast is the Fed is finished raising interest rates.”
With inflation easing, the Fed is expected to keep its key benchmark rate unchanged when it next meets in two weeks.
Does that mean the Fed might instead lower rates?
“I don’t look for the Fed to begin lowering their key interest rate until mid-2024,” Walden said.
Compared with a year ago, consumer prices rose 3% in October, below the 3.4% annual rate in September. That was the lowest year-over-year inflation rate in more than 2 1/2 years.
Excluding volatile food and energy costs, increases in so-called core prices also slowed. They rose just 0.2% from September to October, down from a 0.3% increase the previous month. Core prices rose 3.5% in October from a year earlier, below the 3.7% year-over-year increase in September. Economists closely track core prices, which are thought to provide a good sign of inflation’s likely future path.
The latest figures also suggest that inflation will fall short of the Fed’s own projected levels for the final three months of 2023.
In September, the Fed’s policymakers had predicted that inflation would average 3.3% in the October-December quarter. Prices are now on track to rise by less than that, raising the likelihood that Fed officials will see no need to further raise interest rates.
“They’ve got to be encouraged by this data,” Vincent Reinhart, chief economist at Dreyfus & Mellon and a former Fed economist, said of the central bank’s policymakers. “It is a nice trend down in core inflation. Under the hood, there is a slowing that suggests they’re making progress.”
The Associated Press contributed to this report.