Inflation is at its lowest rate since February 2021.
The U.S. inflation rate dropped to 2.1% in September, bringing the 12-month percentage increase basically in line with the Federal Reserve’s target of 2% annual inflation.
Inflation, as measured by the Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) index, has dropped from a high of 7.2% in June of 2022 to 2.1% in September of 2024. PCE inflation is now at its lowest rate since February of 2021 when it was at 1.8%.
The Fed managed to bring down inflation through a series of interest rate hikes that brought rates to their highest level in more than 20 years, peaking at 5.25% to 5.50%.
In September, the Fed lowered rates by 50 basis points to the current 4.75% to 5.00% range, and it meets again next week when the Fed is anticipated to lower rates another 25 basis points.
PCE inflation drop in line with expectations
Prices rose 0.2% for the month of September and 2.1% over the past 12 months, both of which were in line with expectations. The 2.1% rate is down from 2.2% in August.
Core PCE, which excludes good and energy prices, rose 0.3% in September, which was also expected. The year-over-year core inflation rate was 2.7%, same as September and slightly higher than the 2.6% economists had forecasted.
Compared to the same month one year ago, prices for goods dropped 1.2% while prices for services rose 3.7%. Further, food prices increased 1.2% while energy prices decreased 8.1%.
In addition, there was a $105.8 billion increase in spending, with a rise of $72.1 billion in spending on services and a jump of $33.7 billion in spending on goods.
Within services, the largest contributors to the increase were health care, housing and utilities. Within goods, nondurable goods, led by prescription drugs, food and beverages, and motor vehicles and parts were the main contributors.
Also, personal income increased $71.6 billion, or 0.3%, in September, while disposable personal income (DPI) climbed $57.4 billion, or 0.3%.
Soft landing intact?
The inflation numbers came in one day after the Q3 GDP showed the economy growing at a 2.8% clip, which was higher than anticipated by economists. It indicates, at least to this point, that the Fed may have engineered its soft economic landing, although the focus Friday will be on the unemployment report.
“The economic releases suggest the soft landing is still intact,” Collin Martin, director, fixed income strategy at the Schwab Center for Financial Research, said. “Although there were modest upward revisions to last month’s PCE readings, September’s readings came in right in-line with consensus expectations and suggest that inflation should continue to moderate.”
The Fed meets next week and is widely expected to lower interest rates another 25 basis points.
The markets have largely already priced this in, as stocks were mostly unmoved on Friday, and were in fact moving down a bit. But that was likely due to somewhat disappointing earnings from Microsoft (NASDAQ:MSFT) and Meta Platforms (NASDAQ:META).
