Fed's preferred inflation gauge eases in October

An inflation measure closely watched by the Federal Reserve eased in October, providing some welcome relief to millions of Americans who have been crushed by higher prices.

The personal consumption expenditures (PCE) index showed that consumer prices were unchanged from the previous month, according to the Labor Department. On an annual basis, prices climbed 3% — down from the 3.5% recorded the previous month.

The figures were both mostly in line with estimates from Refintiv economists.

In another sign the Fed's fight against inflation is making progress, core prices — which strip out the more volatile measurements of food and energy — climbed 0.2% from the previous month and 3.5% from the previous year. It marked the best reading for core inflation since 2021.

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While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation. Still, both the core and headline numbers point to inflation that continues to run above the Fed's preferred 2% target.

"The resurgence narrative is misguided," said Jeffrey Roach, chief economist at LPL Financial. "Inflation is cooling and markets could end up pleasantly surprised as inflation could cool faster than expected."

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Other figures included in the report showed that consumer spending rose just 0.2% in October, compared to a 0.7% increase in September. Many economists anticipate that spending will slow in the coming months as consumers continue to grapple with expensive goods, high interest rates and the resumption of federal student loan payments.

Stocks rose Thursday morning as the report fueled investor hopes for the end of the Fed's tightening cycle.

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The Fed skipped a rate hike during its two-day meeting earlier in November, but signaled that another rate hike is on the table this year. However, many economists believe the central bank is done raising interest rates and could soon pivot to cutting borrowing costs.

"Fed officials have already acknowledged that inflation is easing, and that can happen in the face of a strong economy and low unemployment, essentially laying the groundwork for rate cuts," said Sonu Varghese, global macro strategist at Carson Group.