Prices Keep Rising, Fed’s Favored Inflation Gauge Shows

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What's Happening Today

The Federal Reserve's preferred inflation gauge, the core index of personal consumption expenditures (PCE) rose 0.5% in September as prices continued to rise. The index was up 5.1% from a year ago, accelerating from an annual rate of 4.9% in August. The core index excludes food and gasoline prices, which can be volatile. Overall, the broader PCE Price Index that includes food and gasoline prices climbed 0.3% last month and was up 6.2% from a year ago, at the same rate as the previous month.

When Fed policymakers look at inflation, they consider PCE since it is more representative of inflation consumers face than the Consumer Price Index (CPI). But why? You might not realize this, but CPI calculates inflation for only urban consumers, so it isn't as representative of all shoppers in the country.

PCE also includes more items in the index and bases its figures on the goods and services that consumers are buying each month, using data from the stores and businesses where they buy them. In addition, PCE will account for "substitutions" that shoppers like you and I make at the store. In other words, if we buy item X instead of item Y because Y is too expensive, PCE will reflect those differences. The CPI will not. In the end, the PCE Price Index tends to be less volatile than the figures you'll see from the CPI.

But consumers are staying resilient, and continue to buy goods and services, even with prices rising. Personal income jumped 0.4% in September, driven by higher wages as employers continue to spend more to find workers. Personal savings, while on the decline as inflation takes a toll, stood at 3.1% of disposable income.

Even with PCE lower than September's CPI reading of 8.2%, inflation is still persistently higher than the Fed would like as prices continue to rise. So next month when policymakers from the central bank meet, expect even more rate hikes. Right now, the market overwhelmingly believes it will be another big one, of 75 basis points. If you want a loan, it will only get more expensive as rates go higher. And if you are an investor, your portfolio (especially tech stocks) could be negatively impacted.

- Kristin

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Term of the Day

Cash Management Account

A cash management account (CMA) is a cash account that combines features similar to checking, investment, and savings accounts. It's held through financial institutions other than banks and credit unions, such as brokerage firms. The institutions might use partnered banks to store the funds. You can use one or more cash management accounts in place of, or in addition to, a checking account.

CMAs combine both short-term investing and day-to-day banking. They allow you to access your money, pay bills, manage your savings, and earn interest. These accounts are typically separate from a brokerage firm's investment accounts, but the accounts can be linked together.

Off the Charts

Spending rose faster than income in September as pressure on household budgets intensified, according to the latest report on personal income and expenditures from the Commerce Department. As economists at Wells Fargo put it: "In September, consumers continued doing what they have been doing for much of 2022: spending much more than they are making."