September PCE Expected to Show Rising Inflation

Key Takeaways

• Inflation, as measured by the PCE Price Index, is expected to have accelerated in September as oil and fuel prices surged.
• The Fed and investors are eyeing the impact of higher oil prices on the cost of non-energy goods and services.
• Markets expect the Fed to follow last month’s interest rate increase with one more before the end of the year.

Economists expect Thursday’s Personal Consumption Expenditures Price Index report to show that elevated oil and gas prices caused inflation to accelerate in September. The Oct. 29 release of the Federal Reserve’s preferred inflation measure comes after a string of hot inflation reports. The report will be released just one day after policymakers make their second-to-last interest rate decision of the year.

Overall PCE is expected to rise 0.5% from month-ago levels in September, according to FactSet consensus estimates, after increasing 0.3% in August. The annual PCE inflation rate is expected to accelerate to 3.7% from 3.4%. Core PCE, which excludes volatile food and energy prices, is expected to rise 0.3% month over month and 3.1% year over year, both slight accelerations from August.

Economists are watching closely for signs that businesses are passing higher fuel prices along to consumers—a key concern for policymakers as they gauge the durability of this year’s inflation pressures. They’ll also watch how the data center buildout has impacted computer component prices, which surged over the past year as demand outstripped supply.

That said, some economists don’t think the report will have much bearing on the near-term monetary policy outlook. “The August numbers were very encouraging; even a hotter-than-expected print would only partially erase that good news,” says Christopher Hodge, chief US economist at Natixis.

Hodge adds that the Consumer Price Index and Producer Price Index prints earlier this month have primed economists for an accelerating PCE, and that while inflation is the Fed’s primary focus, it can’t be its sole focus, given recent jitters in credit markets. “It would take something way out of consensus (say 0.1% on the downside or 0.5% on the upside) for core [PCE] to shift the narrative much,” he says. He expects Fed officials to leave rates unchanged at their October meeting, which concludes Wednesday, then to lift the federal funds rate by a quarter point in December.

September PCE Inflation Report Highlights

• PCE report release date and time: Thursday, Oct. 29, at 8:30 a.m. EDT
• PCE is expected to rise 0.5% in September after increasing 0.3% in August.
• Core PCE is expected to increase 0.30% in September, compared with a 0.25% increase in August.
• PCE is forecast to rise 3.7% year over year, up from 3.4% in August.
• Core PCE is forecast to rise 3.1% from the year-ago period, up from 3% in August.

After surprisingly hot CPI and PPI prints, Bank of America expects PCE inflation to come in hot as well. “Last month’s inflation pressures were broad, with both core goods and core services accelerating relative to recent trends,” analysts wrote in an Oct. 23 note. “The broad-based strength across September’s inflation data suggests the Fed may need to keep rates higher for long to get inflation back to target.”

Oil fueled CPI inflation last month, and it’s expected to do the same to the PCE Index. Economists at Oxford Economics estimate that PCE energy prices increased 5.4% last month, more than CPI’s 5.2%. However, they say that will have a smaller impact, due to energy’s lower weight in the PCE Index (about 4% vs. 9% in the CPI).

Economists at Citi see rising energy prices boosting inflation, but they “do not see signs of significant energy price pass-through in PPI goods ... Certain PPI goods that tend to lead components in PCE inflation, such as household appliances and jewelry prices, continue to move mostly sideways.” Instead, they see AI-related spending driving up the price of hardware components.

Analysts at Oxford Economics also expect the artificial intelligence buildout to continue to put upward pressure on the PCE in the coming months by way of the computer software and accessories index.

Expectations Point to Fed Raising Rates by Year-End

Since mid-September, when the Fed raised interest rates for the first time in three years, investors have predicted more increases, though the expected pace and extent of those hikes have been highly fluid. The odds of two additional quarter-point hikes exceeded 50% in late September but have moderated significantly this month. As of Tuesday, investors saw just a 9% chance of hikes in both October and December.

Investors believe the far more likely outcome is that the Fed leaves rates unchanged at its October meeting and hikes by a quarter point in December. The odds of one quarter-point hike by year-end stood at over 70% on Tuesday.