Federal Reserve's preferred inflation metric cools in October

Latest inflation data gives US central bank more room to leave interest rates unchanged next month

The Federal Reserve building in Washington. Reuters

An inflation metric closely followed by the Federal Reserve showed that prices continued to moderate last month, giving the US central bank more room to leave interest rates unchanged when it meets in December.

The Personal Consumption Expenditures (PCE) price index rose 0.2 per cent in October, down from a 0.4 per cent rise in September, data released by the Commerce Department on Wednesday showed.

PCE inflation rose 3 per cent year on year, down from 3.4 per cent. Core PCE inflation, which excludes food and energy, rose 3.5 per cent.

Meanwhile, consumer spending slowed. The Commerce Department reported that consumer spending rose 0.2 per cent last month, down from a 0.7 per cent gain in September.

The lag in consumer spending – which accounts for 70 per cent of US economy activity – suggests that the economy will experience a slowdown after a third quarter that saw 5.2 per cent gross domestic product growth.

The Fed has raised interest rates 11 times since March 2022 to tamp down on inflation. By rapidly raising rates to its current range of 5.25 per cent to 5.50 per cent, the central bank has hoped to ease inflation without tipping the economy into a recession.

Following the release of recent economic data, Fed officials hinted that interest rates are likely to be left unchanged when they meet next month.

John Williams, president of the Federal Reserve Bank of New York, on Thursday said that “we are at, or near, the peak level” of the Fed's target range.

Speaking in New York, Mr Williams said interest rates are “estimated to be the most restrictive in 25 years” and that he expects they will maintain a restrictive level “for quite some time” to bring inflation back down to the Fed's 2 per cent goal.

Fed Governor Christopher Waller earlier this week also said he is “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 per cent”.

Thursday's report is the final inflation metric the Fed will receive before its December 12-13 meeting. Traders expect the central bank's target range will remain at 5.25 per cent to 5.50 per cent.