The delayed September Personal Income and Spending report showed that income and outlays were about as expected — up by 0.4 and 0.3 percent respectively. The biggest hit on PCE (personal consumption expenditures) came from motor vehicles and parts — not a surprise given the recent weakness in unit auto sales.
But the key numbers were the PCE price indices, which are the Fed's preferred measures of inflation. The overall PCE price index rose by 0.3 percent, about as expected, while the core PCE price index (removing the volatile food and energy components) moved higher by 0.2 percent for the month, a tad less than expectations. The 12-month trend rates for both were at 2.8 percent — up just a bit from the August trend measures for the total and down by the same small amount for the core.
What are the implications of these data? While inflation adjusted consumer spending was up only slightly for September, for the third quarter as a whole (which will go into the real GDP estimate for the third quarter) real PCE will be a modest positive for the economy. The PCE price measures fit into our view that inflation is stuck (at least for now) at a level moderately above the Fed's 2.0 percent goal. Given the volatility of tariffs in September and the months prior, it is likely that at least some of their impact was not yet in these figures as importers initially would pass through only a portion of the higher tariffs given uncertainty about where tariffs would eventually settle.
These data are lagged significantly from where we are today, but they are the last full inflation (and consumer spending) figures the Fed will see before next week's FOMC meeting. According to the CME Group's FedWatch tool, today's numbers had little impact on the odds of Fed easing for next week — with an 87 percent probability of Fed easing. It is unlikely that the Fed will want to "disappoint" the market and not ease when the market strongly expects easing, so we also look for a 25-bps cut in the federal funds rate at the end of next week's meeting. But the Fed is likely to be clear that further Fed policy moves in 2026 will depend upon the facts on the ground — what is happening with inflation and the job market.
David W. Berson, Ph.D., CBE
Chief Economist
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