Could Inflation Trends Keep Fed Rate Hikes on Pause?

September saw underlying price gains, but not enough to cause the central bank to hike interest rates the following week.

The summertime decline in inflation slowed last month. However, recent improvements in inflation have allowed Fed policymakers to decide to keep interest rates unchanged at their meeting next week.

The Fed’s preferred inflation indicator, the personal-consumption expenditures price index, increased by 0.4% in September compared to August, according to data released by the Commerce Department on Friday. After rising by 0.1% in August, so-called core prices—which do not include the volatile food and energy categories—rose by 0.3% in September.

The primary inflation gauge used by the Federal Reserve is rising, and analysts are blaming Taylor Swift for the increase. Although it is less than August’s 3.8% annual pace, the 3.7% pace is still higher than the Fed’s 2% target. A major contributor to the GDP, consumer spending increased by 0.7% and disposable income increased by 0.3%. Nonetheless, the “funflation” caused by consumers’ spending on entertainment has confounded economists, proving that the US is not in a recession.

Like in August, September saw a 3.4% increase in headline personal consumption expenditures (PCE), which include all goods and services. The labour market is still adding jobs at historical low unemployment rates, and rising wages are supporting strong consumer spending. Since June 2022, when prices were 9.1% higher than the previous year, inflation has also decreased.

Consumer sentiment regarding the economy is trending negatively despite robust consumer spending, decreasing inflation, and almost record-low unemployment. According to a University of Michigan (UMich) survey, consumer confidence in the US fell to 63% in October, the lowest level in a five-month period and a five-point decline from the previous month.

This figure is approaching the lowest point experienced during the Great Recession of 2009, the longest and deepest since the 1930s depression, and is much below even the pandemic-induced sentiments of 2020. While global events keep consumers on edge, rising petrol prices, housing costs, and mortgage rates are having a negative impact on household budgets.

Traders are closely watching the Fed’s policy meeting on Nov. 1, where traders are close to fully certain that it will not raise rates.