Key US inflation metric falls to lowest level in three years

A closely watched measure of inflation in the United States fell to its lowest point in three years, raising the prospect of another interest rate cut in the world’s biggest economy next week.
The US Commerce Department’s personal consumption expenditures (PCE) price index, a key metric used by the Federal Reserve, slipped to 2.1 per cent on an annual basis in September from 2.3 per cent in August, the lowest reading since February 2021.
On a monthly basis, the PCE price index edged up to 0.2 per cent in September from 0.1 per cent in August, in line with Wall Street expectations.
Money markets put the chances of a 25 basis-point cut at the central bank meeting on Thursday at about 94 per cent, with a second 25 basis-point cut in December given a 70 per cent chance. The Fed lowered its policy rate in September by half a percentage point to the 4.75 to 5 per cent range.
Christophe Boucher, chief investment office at ABN AMRO Investment Solutions, said: “The recent data prints point to a quarter-percentage cut in the November meeting, followed by another in December.” He added that “the narrative would most likely be nuanced due to persistent core pressures”.
A separate report from the US Department of Labor showed that the broad wage-growth gauge known as the employment cost index rose by 0.8 per cent in the third quarter from the previous quarter, the smallest increase since the second quarter of 2021.A rise in labour costs was among the factors that had alarmed Fed policymakers in late 2021, prompting the central bank’s pivot to a tighter policy to head off an upward spiral of rising wages and prices.
Gregory Daco, chief economist at the tax and accounting firm EY, said: “It’s essentially the soft landing that many of us dreamed of,” alluding to an outcome where the Fed brings inflation back to the 2 per cent target without engineering a recession.
“You really have the best of both worlds, with consumer spending growth remaining resilient and inflation moving within striking distance of the Fed’s 2 per cent target,” he added.
Data this week showed that the US economy expanded by an annualised rate of 2.8 per cent in the three months to September, below analysts’ forecasts. The US has been by far the fastest-growing country in the G7 group of seven of the world’s advanced economies since the Covid-19 pandemic.
Analysts have, however, raised alarm over inflation staying higher for longer if Donald Trump wins the US presidential election and raises tariffs on imported goods. Such a scenario could lead to the Fed lowering borrowing costs slower.
Traders have priced in this possible outcome, with US Treasury yields up sharply over the past month, serving to strengthen the dollar against a basket of comparable currencies.