US Prices: PCE Rises – Is the Pressure on the Fed Building?

TVS News AI, editorially supervised, presents US Prices: PCE Rises – Is the Pressure on the Fed Building.

The Personal Consumption Expenditures index, or PCE, registered an inflation rate of 3.6 percent compared with the previous year in September. The Bureau of Economic Analysis (BEA) reported this on Thursday. In August, the rate was 3.4 percent. Inflation has therefore accelerated again, even though the published data matched expectations exactly.

For monetary policy, this is important news: The Fed wants to reach its 2 percent target and is now facing strong economic growth at the same time. You can find details on price developments and growth in the Handelsblatt's detailed report.

3.6 Percent Inflation: PCE Is Above the Fed's Target

Inflation is rising again

According to the report, the PCE is the Fed's most important inflation measure. In September, the year-on-year change stood at 3.6 percent. This means the gap between inflation and the Fed's 2 percent inflation target has widened with the new data.

The figure was not a shock, however, because it matched expectations. This is the strongest argument against a dramatic response: The Fed is receiving data that markets had already priced in. Nevertheless, the increase from 3.4 to 3.6 percent is clear and increases the pressure to act within the central bank.

The core rate is also rising

The core PCE rate rose slightly from 3.0 percent in August to 3.1 percent in September. This core rate excludes the more volatile prices for food and energy. Observers use it to assess how strongly the high oil, fuel and gas prices caused by the Iran war are affecting other parts of the economy.

This is where the important monetary-policy connection lies: If price pressure appears in industries beyond energy and food, inflation is likely to be more persistent. The 3.1 percent figure shows, at any rate, that the increase is not solely due to the excluded price categories.

86 Percent Expect a 0.25 Percentage-Point Rate Increase

Expectations for December

According to futures-exchange CME data, 86 percent of market participants currently expect the Fed to raise interest rates by 0.25 percentage points before the end of the year. The upcoming December meeting is therefore clearly in focus.

On Wednesday, the Fed left interest rates unchanged and said it would wait for further data. The PCE report and the first estimate of third-quarter growth now provide precisely the kind of new information to which the central bank responded with that decision.

What is certain – and what is not

The sources do not name a specific interest-rate decision for December. The 86 percent figure represents the CME participants' assessment of the market, not a commitment from the Fed. The only certainty is that rising PCE and strong economic data increase the pressure to bring 2 percent inflation back into focus.

3.4 Percent Growth: The Strongest Expansion in a Year

A first estimate for the third quarter

The BEA also published its first estimate of US economic performance for the third quarter, which has just ended. The economy grew at an annualized rate of 3.4 percent. This was the highest figure in a year and was slightly above the previously expected growth data.

The Fed is therefore facing not only higher prices but also robust economic growth. This gives inflationary pressure an economic foundation, making loose monetary policy appear less plausible. At the same time, growth provides investors with a strong signal because demand for corporate output is rising.

Data centers and AI drive the increase

According to BEA data, the increase was driven mainly by higher investment in data-processing equipment. This refers to billions being spent on data centers and the associated AI infrastructure. Households also increased their spending on medical services and medicines.

Why “annualized” is important

US growth data are published on an annualized basis. The BEA assumes that a quarter's growth continues for a full year. For a rough comparison with European rates, the US rate is divided by four. The 3.4 percent figure therefore does not describe growth over three months, but a rate calculated on an annual basis.

What the Data Mean for the Fed

The combination is clear: PCE rises to 3.6 percent, the core rate to 3.1 percent, and the third quarter grows at an annualized rate of 3.4 percent. Higher inflation is therefore meeting one of the strongest economic expansions in a year.

The strongest argument against immediate action remains that the PCE data matched expectations and that the Fed only decided on Wednesday to wait for more data. Nevertheless, the pressure to act is real: 86 percent of market participants tracked by the CME expect an increase of 0.25 percentage points before the end of the year. The Fed's next meeting in December is therefore the specific date on which the debate over further rate hikes will be decided.