The U.S. economy appears to have caught a bit of a chill. And top Federal Reserve officials think inflation will continue to cool off, too.
The next big test: The October PCE inflation report due on Thursday morning.
Economists polled by The Wall Street Journal predict a mild 0.2% increase in the so-called core rate of PCE inflation. The Fed views the core rate, which omits food and energy, as the best predictor of future inflation.
Senior Fed officials don’t ignore food and gas prices, of course, but they tend to be very bouncy and can send misleading signals about inflation more broadly.
If the forecast is spot on, the annual increase in core inflation would slow to around 3.5% from 3.7% the prior month. That would be the smallest increase since April 2021.
Still, the Fed’s work is far from done. The rate of inflation is running well above the bank’s 2% target, and it’s more than twice as high as the average increase each year from 2010 to 2019.
The big question is whether the Fed has to raise interest rates again to further slow the economy and make sure inflation decelerates to its 2% goal.
Most Fed officials and Wall Street investors appear to think interest rates are high enough to do the job.
The bank has raised its benchmark short-term rate to a top end of 5.5% from near zero in just 18 months, leaving it near a several-decade high.
“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%,” said Fed Gov. Chris Waller in a speech on Tuesday.
Higher rates have filtered through the economy, slowed home purchase and auto sales and curbed business investment. The fourth quarter is shaping up to grow just 1% to 2%, down from a frothy 5.2% in the third quarter.
Yet given the uneven progress on lowering inflation, Fed Gov. Michelle Bowman said central bank needs to on guard against another uptick in prices. The Fed has been fooled before, she noted.
A bigger rise in core PCE could be one such warning sign. An increase of 0.3% or more, for instance, could cause a very negative market reaction.
The PCE report will be released at 8:30 a.m. Eastern.
Overall PCE inflation is expected to edge up 0.1% in October, nudging the yearly rate down to 3.1% from 3.4%.
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