The latest inflation data has raised concerns about the Federal Reserve’s progress in achieving its 2% target. After months of rate hikes, recent reports suggest inflation might be stalling. Here’s what the numbers show and what they could mean for future economic decisions.

Inflation Shows Little Change in October

In October, the core Personal Consumption Expenditures (PCE) index, which excludes food and energy prices, rose 0.3% from the previous month. This increase was in line with expectations and matched the September reading. On a yearly basis, core PCE rose 2.8%, slightly above the 2.7% in September. Meanwhile, overall PCE, which includes food and energy costs, increased 2.3%, up from 2.1% in the prior month.

While these increases aren’t extreme, they indicate that inflation is not falling as quickly as the Federal Reserve would like.

The Fed's Rate Cut Dilemma

The Federal Reserve has been raising interest rates over the past year to combat inflation. However, these recent inflation numbers have created uncertainty about whether the Fed will continue its rate-cutting plans.

Paul Gruenwald, Chief Economist at S&P Global Rating

“Core PCE has been going sideways for the last couple of months,” said Paul Gruenwald, Chief Economist at S&P Global Ratings, adding that the Fed may lean toward a pause rather than further cuts unless inflation shows more convincing signs of decline.

Federal Reserve Governor Michelle Bowman also acknowledged that while inflation has dropped significantly since early 2023, it has "stalled" in recent months, calling for caution in rate cuts.

Will the Fed Cut Rates in December?

Despite inflation's stagnation, markets are still betting that the Fed will cut rates by December. Currently, there’s a 67% chance that the central bank will lower rates at its next meeting.

CME FedWatch Tool showing 66.5% probability of target rate of 425-450 bps

However, the timing of such cuts depends on upcoming data. November’s CPI and PPI reports, due before the Fed’s meeting, could strongly influence the Fed’s decision.

Recent data from other inflation measures, like the Consumer Price Index (CPI), which rose 3.3% year-over-year in October, and the Producer Price Index (PPI), which increased 3.1%, show that inflation pressures are not easing significantly.

Looking Ahead

The path to the Fed's 2% inflation target is still uncertain. The next few months of economic data will be crucial in determining whether the central bank will press forward with rate cuts or hold off until inflation shows clearer signs of improvement.

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