PCE vs. CPI: Different perspectives on core inflation measures

The Personal Consumption Expenditures Price Index (PCE) is a monthly inflation indicator released by the U.S. Department of Commerce’s Bureau of Economic Analysis (BEA). It assesses the overall economic health and inflation levels by tracking consumer items such as food, energy, and medical care.

Core PCE excludes volatile food and energy prices and can more accurately reflect inflation trends. It is one of the key indicators that the Federal Reserve focuses on. Rising core PCE means increased inflationary pressure, which may prompt the Federal Reserve to take interest rate hikes; if core PCE slows down, the Federal Reserve may loosen monetary policy.

PCE is significantly different from the Consumer Price Index (CPI). PCE is more comprehensive and covers all consumer expenditures, while CPI mainly reflects the expenditures of urban consumers. Therefore, PCE has become an important reference for the Federal Reserve when assessing inflation.

PCE data for September: Inflationary pressures eased

U.S. PCE data in September showed that the annual price growth rate was 2.1%, hitting the lowest level since the beginning of 2021, close to the Federal Reserve's 2% inflation target, indicating that price pressure has eased.

PCE increased by 0.2% from the previous month, in line with market expectations. The core PCE annual growth rate was 2.7%, slightly higher than the expected 2.6%, and increased by 0.3% month-on-month, which was the largest monthly increase since April. This was mainly due to rising service prices, reflecting that inflationary pressure has not completely subsided.

Consumer spending and personal income growth

Consumer spending increased by 0.5% in September from the previous month, and the inflation-adjusted growth rate was 0.4%, indicating that consumer spending remains strong, especially on the purchase of goods.

Personal income increased by 0.3% month-on-month, in line with expectations, but the growth rate of disposable income was relatively limited as the savings rate dropped to 4.6% and interest income decreased. A drop in the savings rate has supported consumer spending, suggesting consumers are gradually dipping into their savings to cover expenses.

Immediate reaction of financial markets

After the PCE data was released, the U.S. dollar index fell to 103.92, while the 10-year U.S. Treasury bond yield once rose to 4.307%, indicating that the market is divided on future inflation and interest rate policies. Affected by risk aversion, spot gold prices fell 0.8% to $2,764.41 per ounce.

At the same time, the U.S. stock market fell due to Microsoft (MSFT) and Meta (META) financial reports falling short of expectations. The Nasdaq index fell 2%, and the S&P 500 index and the Dow Jones index fell 1.25% and 0.67% respectively.

FED policy outlook: Market expectations remain cautious

Market analysis pointed out that September's price data and strong consumer spending may prompt the Federal Reserve to remain cautious in policy decisions. According to CME Group's FED Watch tool, traders generally see a 96% chance of a 1-cent rate cut in November and a 69.9% chance of another rate cut in December.

Analysts believe that core inflation remains high, and the FED may continue to monitor inflation data before further cutting interest rates to assess whether it is consistent with long-term controllable levels.