September PCE +0.1%, Inflation Moderating On Oil Declines, Rates Could Drop

Overall Personal Consumption Expenditures, the Fed’s favorite measure of consumer inflation, were +0.1% in September and +4.1% year-over-year through September. Excluding volatile oil and food costs from the readings, “Core” PCE for September was +0.1% and +2.3% YOY through September. Below are the numbers for the third quarter.

Overall PCE Third Quarter:
Sept-Mo= +0.1%, Aug-Mo= +0.03%, July-Mo= +0.5%
Sept-Yr= +4.1%, Aug-Yr= +4.4%, July-Yr= +4.5%

Core PCE Third Quarter
Sept-Mo= +0.2%, Aug-Mo= +0.2%, July-Mo= +0.1%
Sept-Yr= +2.4%, Aug-Yr= +2.4%, July-Yr= +2.3%

The Fed tends to look at Core PCE excluding food and energy prices because of the price volatility of these items, and the Fed’s zone for reasonable inflation is 1-2% per year. The Core number is approaching the 2% level which would be within their comfort zone. The Fed commented on moderating inflation briefly in their statement following Wednesday’s FOMC meeting. Their next FOMC meeting is December 16.

With oil at $68 now versus $145 early-summer, we can see why core PCE inflation is moderating. Also the Fed is more concerned about credit crisis issues than inflation right now. The Fed is doing everything it can with liquidity injections and backing large bank and insurance companies to keep the economy from derailing. The balancing act is that they still have to watch inflation closely because if all of the credit crisis remedies work, then the economy could take off again, and the Fed would have to hike rates.

So the PCE has been overshadowed by more pressing short-term credit market developments. But if oil, jobs and housing continue on current trendlines, rates may drop as we move into the fourth quarter.