The Federal Reserve's favorite inflation indicator rebounds! The U.S. core PCE price index in October rose 2.8% year-on-year

On Wednesday, November 27, the U.S. Department of Commerce released a report showing that the Federal Reserve's favorite inflation indicator, while meeting expectations, rebounded in October from September, reaching 2.8%. This data supports the stance of Federal Reserve officials to take a more cautious approach to interest rate cuts in the future.

The U.S. October PCE price index is as follows:

The Federal Reserve's favorite inflation indicator—the core PCE price index, excluding the more volatile food and energy prices, rose 2.8% year-on-year in October, the highest level since April this year, in line with expectations of 2.8%, with the previous value in September being an increase of 2.7%.

The core PCE price index rose 0.3% month-on-month in October, matching expectations of 0.3%, with the previous value in September also showing an increase of 0.3%.

The PCE price index rose 2.3% year-on-year in October, in line with expectations of 2.3%, with the previous value in September being an increase of 2.1%.

The PCE price index rose 0.2% month-on-month in October, matching expectations of 0.2%, with the previous value in September also showing an increase of 0.2%.

Calculated on a three-month annualized basis, the core PCE price index increased by 2.8%, and economists believe this indicator can more accurately reflect the trajectory of inflation.

Breakdown of U.S. PCE Inflation

Rising service prices were the main driver of inflation in October, increasing by 0.4%. Service inflation reflects a surge in portfolio management fees, which is synchronized with the rise in U.S. stocks, and the increase in the U.S. stock market has a significant impact on core PCE inflation. The core service prices, excluding housing and energy, rose 0.4% month-on-month compared to September, marking the largest increase since March of this year, with the super core PCE services soaring 3.5% year-on-year.

In October, commodity prices fell by 0.1%, while core commodity costs remained unchanged.

Food prices remained almost unchanged, while energy prices fell by 0.1%.

Although there are expectations that inflation will slow down with declining rents, housing-related costs have continued to push up inflation numbers, rising by 0.4% in October.

The Federal Reserve has set an inflation target of 2% annually. U.S. PCE inflation has been above this level since March 2021, peaking at around 7.2% in June 2022, which prompted the Federal Reserve to take aggressive rate hike actions.

Although U.S. inflation has significantly decreased since the Federal Reserve began tightening monetary policy, inflation remains a tricky issue for households and plays a significant role in the U.S. presidential campaign. Despite a slowdown in inflation rates over the past two years, the cumulative impact of inflation has severely affected consumers, especially those with lower wage levelsThe Federal Reserve uses a range of indicators to measure inflation, among which the PCE data is particularly important, serving as a key metric for officials to forecast and as a primary policy tool. This data is considered broader than the Consumer Price Index (CPI) from the U.S. Department of Labor and is adjusted based on consumer spending behavior (such as substituting cheaper goods for more expensive ones).

Previously, the Federal Reserve cut interest rates consecutively in its meetings in September and November, totaling a reduction of 75 basis points. The minutes released yesterday showed that many supported gradual rate cuts, with some officials suggesting the possibility of pausing rate cuts. The latest PCE data confirms the general view among Federal Reserve officials: as long as the U.S. labor market remains healthy and the economy continues to grow robustly, there is no need to rush into rate cuts.

Additionally, the economic agenda of President-elect Trump will complicate the policy path ahead. Some companies have already indicated that they are considering raising prices early next year due to anticipated tariff increases. Data from Yale University's Budget Lab shows that Trump's tariff policy and the retaliatory tariffs it has triggered will lead to price increases across the board, from fruits to automobiles, resulting in a 0.75 percentage point increase in U.S. CPI.

Personal Income and Consumption

Data released on the same day also showed that consumer spending remained strong in October, but declined compared to September. U.S. personal consumption expenditures (PCE) rose 0.4% month-on-month in October, in line with expectations of 0.4%, but lower than the previous value of 0.5% in September. The inflation-adjusted real personal consumption expenditures rose 0.1% month-on-month in October, compared to an expected increase of 0.2%, with the previous value for September revised up from 0.4% to 0.5%.

In terms of detailed categories of consumer spending, service expenditures accounted for the majority of household consumption, growing 0.2% month-on-month in October, mainly reflecting healthcare spending; goods spending saw a slight increase.

U.S. personal income surged 0.6% month-on-month in October, far exceeding the expected increase of 0.3%, with the previous value for September at an increase of 0.3%. Inflation-adjusted disposable personal income grew 0.4% in October, marking the largest increase since January. Nominal wages and salaries rose steadily by 0.5% month-on-month. Income data suggests that spending may grow healthily in the coming months.

The personal savings rate increased in October, marking the first rise since earlier this year.

Despite the current robust performance of the U.S. job market, higher living costs are squeezing household budgets. This also explains why Americans have indicated plans to reduce spending on holiday gifts this year. Economists will closely monitor "Black Friday" sales data to gain further insights into consumer spending willingness. Well-known retailers such as Target, Best Buy, and Walmart have extended their holiday promotions in hopes of attracting discount-seeking consumers

December Still Expected to Cut Rates, Nasdaq Declines

After the release of the U.S. PCE inflation data, market expectations for a rate cut by the Federal Reserve in December were not dampened, with U.S. stocks showing mixed results, particularly the Nasdaq 100 and other tech stocks:

• The Dow Jones Industrial Average rose briefly, but the S&P 500 and Nasdaq Composite Index both fell, with the Nasdaq 100 subsequently expanding its decline to over 1%.
• U.S. Treasury yields rose briefly but remained in a downward trend for the day. The yield on the two-year U.S. Treasury note rose less than 2 basis points, approaching 4.23%, with the overall decline for the day narrowing to less than 3 basis points. After this, U.S. Treasury yields fell again.
• Despite the rise in October's PCE inflation data, traders still increased their bets that the Federal Reserve would cut rates again in December. According to the Chicago Mercantile Exchange (CME) FedWatch indicator, on Wednesday morning local time, the probability of a 25 basis point cut in the key borrowing rate by the Federal Reserve was 66%