Forecasts for October PCE Report Show Uptick in Inflation but Broader Improvement Trend Intact

Forecasts for the October Personal Consumption Expenditures Price Index report find that inflation continued to move sideways last month, but analysts say the overall disinflation trend remains.

Price pressures have fallen significantly lower from their peak two years ago, but improvement has slowed in recent months. The PCE Index is the Federal Reserve’s preferred measure of price pressures. The central bank targets PCE inflation of roughly 2% over time for a healthy economy.

In October, economists expect that the overall PCE Price Index rose 0.2% on a monthly basis and 2.3% on an annual basis, according to FactSet’s consensus estimates. Core PCE inflation, which excludes volatile food and energy prices, is expected to rise 0.29% on a monthly basis and 2.8% on an annual basis. Both measures are expected to rise compared to September, but analysts say price pressures are still improving. A higher reading in October “doesn’t derail the longer-term trend,” says Russell Price, chief economist at Ameriprise Financial.

Keep an Eye on Base Effects

Base effects will likely drive PCE inflation slightly higher in October. Price explains that weak inflation numbers in October 2023 mean this week’s numbers will look stronger in comparison.

Broadly, economists expect inflation to continue moderating in 2025, despite some setbacks this fall and the impact of base effects. “These could be potential head fakes,” says Jeffrey Roach, chief economist for LPL Financial. “I don’t think this is necessarily a change in trend.” By early 2025, Roach expects the annual rate of inflation to “look really favorable.”

Earlier this month, Bank of America economists wrote: “While inflation has certainly made progress, it is showing signs of getting stuck above the Fed’s 2 percent target ... We do not think markets should panic.” They point to idiosyncratic drivers of higher prices in October (like rising airfares), along with economic fundamentals that support further disinflation.

September PCE Report Highlights

• PCE report release date and time: Wednesday, Nov. 27, at 8:30 a.m. EDT
• The PCE Price Index is forecast to rise 0.20% in October after rising 0.18% in September.
• Core PCE is forecast to rise 0.29% in October after rising 0.25% in September.
• Year over year, the PCE Price Index is forecast to rise 2.3% in October after increasing 2.1% in September.
• Core PCE year over year is forecast to rise 2.8% in October after increasing 2.7% in September.

Much of the source data used in the PCE Price Index report is derived from the Consumer Price Index report, released earlier every month. Overall, October’s CPI report showed inflation slightly higher, thanks to rising prices for food, shelter, and used cars. Critically, however, the two indexes are weighted differently. Housing and auto prices have a smaller impact on the PCE than the CPI. Price points out that medical care costs are weighted highest in the PCE Index. Those improved in the CPI report, leaving some room for the PCE to underperform analyst estimates.

Roach says two more categories to watch will be airfares and financial services and insurance costs, both of which were running hot this year but have since moderated.

Will the Fed Cut Rates in December?

Investors have spent the past several weeks dialing back their expectations for interest rate cuts from the Fed. Markets see a roughly 45% chance that the central bank will hold rates steady at its upcoming December meeting, according to data from the CME FedWatch Tool. A month ago, that probability was 24%.

Roach expects the Fed to skip a cut in either December or January, followed by no more than four cuts over 2025. Bank of America’s analysts expect a December cut, but add that “the risk appears to be tilting towards a shallower cutting cycle given resilient activity and stubborn inflation.”