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Fed’s Preferred Inflation Gauge Hits Lowest Level Since Pandemic

As the presidential race influenced heavily by Americans’ frustration with high prices nears its conclusion, the government announced on Thursday that an inflation gauge closely monitored by the Federal Reserve has declined to near pre-pandemic levels.

According to a report from the Commerce Department, prices increased by just 2.1% in September compared to the same month a year ago, a slight decrease from August’s 2.3% rise. This rate is nearly aligned with the Federal Reserve’s 2% inflation target and comparable to figures from 2018, well before the post-pandemic price surge.

Despite this progress, some inflationary pressures persist. Excluding the more volatile food and energy categories, core prices saw a 2.7% rise in September from the previous year, a consistent rate for the past three months. On a monthly basis, core prices rose 0.3% from August to September, an increase from the 0.2% observed from July to August, which exceeds the Federal Reserve’s preference.

Nevertheless, over the last six months, core inflation has decreased to a 2.3% yearly rate, down from 2.5% in August. Economists anticipate that the Federal Reserve may lower its key rate by a quarter-point at its upcoming meeting.

Gregory Daco, the chief economist at the tax and accounting firm EY, described the situation as “essentially the soft landing that many of us dreamed of,” where high-interest rates succeed in curbing inflation without triggering a recession. He noted that consumer spending growth remains robust while inflation is nearing the Federal Reserve’s 2% target.

Additionally, the government released the employment cost index on Thursday, which indicated that wages and benefits rose by just 0.8% during the July-September quarter, marking the slowest growth in three years. Compared to the same quarter last year, workers’ paychecks, excluding those of government employees, increased by 3.8%, aligning with the Federal Reserve’s inflation objectives, according to Daco.

While faster wage growth can benefit workers, it may also contribute to inflation if businesses pass on increased labor costs to consumers by adjusting prices upwards.

Overall, the latest indicators of a sustained reduction in inflation arrive just five days before an election, during which many voters have expressed dissatisfaction with the economy, primarily due to average prices being almost 20% higher than four years ago. Former President Donald Trump attributes much of the blame to the Biden-Harris administration’s energy policies and has committed to eliminating inflation if elected. Vice President Kamala Harris has proposed measures to ban grocery price gouging and lower child care and health care costs.

Economists have expressed concerns that Trump’s policies might exacerbate inflation due to plans for implementing significant new tariffs and mass deportations. Meanwhile, experts suggest that Harris’ proposals on price gouging would have minimal immediate impact.

The report also showed that Americans continue to have sufficient confidence in their financial situations to maintain their spending habits, with expenditures rising 0.5% from August to September. This consumer behavior has contributed to economic growth in the July-September quarter.

Incomes, however, increased at a slower pace last month, with a rise of only 0.3%. Consequently, Americans reduced their savings, resulting in a savings rate of 4.6%, down from 4.8% the month before.

On a monthly basis, prices saw an increase of 0.2% from August to September, up slightly from a 0.1% increase between July and August.

Inflation peaked at 7.1% in June 2022 after the economy quickly recovered from the pandemic recession amid intense parts and labor shortages, according to the personal consumption expenditures price index released on Thursday. Inflation has gradually cooled over the past two years as supply chains have stabilized and the Federal Reserve raised its key interest rate to a four-decade high, impacting home sales and vehicle purchases.

The Federal Reserve generally favors the personal consumption expenditures (PCE) price index, which accounts for changes in consumer shopping habits when inflation is high, over the consumer price index (CPI). The PCE index often records lower inflation rates than the CPI partly because rents, which have remained high, are given twice the emphasis in the CPI compared to the PCE index.

Federal Reserve Chairman Jerome Powell indicated in late August that the central bank is growing more confident about managing inflation. A slowdown in hiring in July and August, along with these trends, led the Fed to reduce its key rate by a significant half-point last month. As inflation continues to decrease, further quarter-point rate reductions are anticipated in November and possibly again in December.

However, the outlook for further rate cuts remains uncertain. Hiring rebounded notably in September, and the unemployment rate fell to 4.1%, suggesting a stronger job market than previously assessed. Retail sales also increased last month, and the government estimated that the economy expanded at a 2.8% annual rate in the July-September quarter, largely driven by substantial consumer spending.

This positive economic data has led to speculation that the Federal Reserve may reconsider a rate reduction in December or proceed more cautiously with rate cuts next year.

The government is set to release its final major economic report before the presidential election: the October jobs report. This report may present a complicated outlook for the labor market due to the impact of Hurricanes Helene and Milton, which are believed to have temporarily displaced tens of thousands of workers.

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