US September PCE inflation rises to 3.6%, raising the risk of another Fed hike

The US Commerce Department reported that September's Personal Consumption Expenditures (PCE) price index rose 3.6% from a year earlier, up from 3.4% in August. The index tracks prices of goods and services households buy and is the measure the Federal Reserve uses for its 2% inflation target.^[1] Prices rose 0.5% from the previous month, matching expectations.^[2]

Higher gasoline and other goods prices helped drive the acceleration, while consumer spending also rose.^[3] The release came a day after the Fed held interest rates steady; coverage said it supported economists' expectations of a December rate increase, which remains an expectation rather than a policy decision.^[4][3]

Faster inflation strengthens the case for the Fed to keep rates high or raise them again.^[3] If that policy pressure persists, businesses taking out new loans or replacing maturing debt could face sustained interest costs. Household borrowing could also remain expensive, restraining housing and other big-ticket purchases. Higher returns demanded by investors can also pressure stock valuations that rely heavily on profits many years away.

The latest bond-market moves provide important context: on October 29, the two-year Treasury yield was 4.61%, down 0.06 percentage points from the previous session, while the ten-year yield fell 0.07 points to 4.98%. Yields are the returns investors receive on bonds and influence other borrowing rates. The inflation report therefore adds a risk of persistently expensive financing, while yields themselves declined that day.

Higher gasoline prices also absorb household budgets, leaving less room for other purchases. Coverage also reported rising consumer spending, so the evidence establishes greater price pressure without establishing a decline in spending.^[3]

Impact

What to watch next

• The October 30 third-quarter Employment Cost Index will test whether wage and benefit pressures are easing. Quarterly growth is estimated at 0.8%, versus 0.9% previously; a higher reading would reinforce inflation concerns.
• The November 4 ISM Services PMI for October will show whether service-sector activity remains resilient. The estimate is 54.5, versus 54.9 previously; a stronger result could give the Fed more room to keep rates high.