September PCE Forecasts Show Mixed Picture, but Fed Still Seen on Track for November Cut

Forecasts for the September Personal Consumption Expenditures Price Index report see the overall inflation rate continuing to fall, led in part by declining gas prices.

The report is also expected to show some stickiness in categories like healthcare and financial services. On balance, it’s expected to leave room for the Federal Reserve to continue cutting interest rates.

Economists expect that the overall PCE Price Index rose 0.2% on a monthly basis and 2.1% on an annual basis in September, according to FactSet’s consensus estimates. They predict the core measure of inflation to remain somewhat elevated, forecasting a 0.3% rise on a monthly basis and a 2.6% rise on an annual basis.

“For the most part, things are trending lower,” says Russell Price, chief economist at Ameriprise Financial. If headline PCE inflation comes in as expected, it will be the lowest such reading since February 2021.

The PCE Index is the Fed’s preferred measure of price changes. The central bank targets an inflation rate of roughly 2% over the long term for a healthy economy. “There’s still a bit of ground to cover” before the Fed reaches its goal, according to Price. He is anticipating 2.1% overall PCE inflation and 2.7% core PCE inflation in September, roughly in line with consensus.

September PCE Report Highlights

• PCE report release date and time: Thursday, Oct. 31 at 8:30 a.m. EDT.
• The PCE Price Index is forecast to rise 0.20% in September after rising 0.09% in August.
• Core PCE is forecast to rise 0.29% in September after rising 0.13% in August.
• The PCE Price Index year over year is forecast to rise to 2.1% in September after increasing 2.2% in August.
• Core PCE year over year is forecast to rise 2.6% in September after increasing 2.7% in August.

Much of the component data of the PCE report comes from the Consumer Price Index report, released earlier in the month. September’s CPI report showed mixed inflationary pressures, with readings on housing, car insurance, healthcare, and airfare somewhat elevated. However, it showed price declines in the energy category, which includes gasoline. The PCE report will likely paint another mixed picture, though individual categories are weighted differently in each index.

Price attributes the expected divergence between the overall PCE and core PCE measures to a combination of falling energy prices and rising healthcare prices. “A rebound in healthcare costs for September is likely to be reflected in the core rate being a little bit hotter,” he explains.

What’s Next for the Fed?

In September, the Fed cut interest rates for the first time since the onset of the pandemic. Now, investors are closely watching inflation and the labor market for clues about the central bank’s next move. Concerns about an overly cool jobs market have faded somewhat, but analysts say the Fed will be more focused on that half of its mandate now that inflationary pressures have eased.

“We’re in a bit of a tricky spot right now,” says Matt Rowe, head of portfolio management and cross-asset strategies at Nomura Capital Management, as the Fed and the market parse what kind of interest rate policy will help the central bank find a balance between reaching its inflation goals and maintaining a healthy jobs market. As price pressures have eased, “the most concerning thing they have on their mind is the labor market,” he says.

The Fed will watch the PCE data closely before its November policy meeting next week. Still, many analysts don’t expect Thursday’s release to alter the central bank’s long-term path.

Bond markets are pricing in a more than 95% chance of a 0.25% interest rate cut in November, according to the CME FedWatch Tool. That would bring the target federal funds rate down to a range of 4.50%-4.75%.

“While core PCE will be firmer than recent months, we think it will be enough for the Fed to follow through with a 25bp cut in November,” wrote Bank of America analysts in a note to clients earlier this month. They’re forecasting 0.23%-0.26% growth in core PCE inflation for September.

Price expects the Fed to hold rates steady in November and resume cuts in December. He says one rate cut per quarter is a reasonable expectation for the central bank.

After the PCE report is released on Thursday, investors will turn their attention to Friday’s nonfarm payrolls report.