Consumer inflation continued at a moderate, but manageable, pace in October.
As shown in the LPL Chart of the Day, the core Consumer Price Index (CPI), which excludes food and energy prices, rose 2.3% year over year in October. That’s slightly lower than September’s 2.4% year-over-year growth, which was the fastest pace of the economic cycle.
Core CPI tapered off last month, but inflationary pressures have recovered noticeably since slowing earlier this year. Core CPI has increased at least 2.3% year over year for the past three months, the first time that’s happened since May 2012.
Modestly rising inflation is a healthy trend in this macroeconomic environment, as domestic inflation remains just below the Federal Reserve’s (Fed) expectations. Core Personal Consumption Expenditures (PCE) rose 1.7% year over year in September, below the Fed’s 2% target for the gauge. While core CPI is an important indicator of inflation, core PCE tracks prices for a different (and more flexible) set of goods, and core PCE has historically increased at a slower rate than core CPI.
“Consumer inflationary pressures have picked up, but inflation is still below the Fed’s expectations,” said LPL Financial Senior Market Strategist Ryan Detrick. “We believe full employment, rising wages, and low interest rates will continue to help sustain manageable inflation growth near the Fed’s target.”
Of course, if inflationary pressures rise too quickly, it could signal that the economy is at risk of overheating. We haven’t seen any signs of excessive inflation at this point, though. Wages have grown in step with pricing pressures, and consumer spending remains solid.
Going forward, the Fed will be looking for core PCE growth to move closer to 2% amid a pause in interest rate cuts. On October 30, Fed Chair Jerome Powell said policymakers would need to see “a really significant move up in inflation that’s persistent” before considering tightening policy again.
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