September’s Personal Consumption Expenditures (PCE) showed that headline inflation rose 0.2% from August, while the year-over-year reading fell from 2.3% to 2.1%. Core PCE, the Fed’s preferred method which strips out volatile food and energy prices, rose 0.3% monthly. The year-over-year reading held steady at 2.7%, remaining near the lowest level in over three years.
What’s the bottom line?
The trend of monthly Core PCE readings have been favorable and in line with what the Fed wants to see. In fact, if we annualize the last three months of readings, Core PCE would be 2.32%, which is closer to the Fed’s 2% target. Plus, shelter costs remain the largest contributor to inflation, and they’re still overstated due to the lag effect. Inflation would be even lower if more real-time shelter costs were better reflected in the reporting.