Key Fed inflation rate hits 2.1% in September, as expected

Inflation increased slightly in September and moved closer to the Federal Reserve’s target, according to a Commerce Department report Thursday.

The personal consumption expenditures price index showed a seasonally adjusted 0.2% increase for the month, with the 12-month inflation rate at 2.1%, both in line with Dow Jones estimates. The Fed uses the PCE reading as its primary inflation gauge, though policymakers also follow a variety of other indicators.

Fed officials target inflation at a 2% annual rate, a level it has not achieved since February 2021. The September headline rate was down 0.2 percentage point from August.

Though the headline number showed the central bank nearing its goal, the inflation rate was at 2.7% excluding food and energy, after the so-called core measure increased 0.3% on a monthly basis. The annual rate was 0.1 percentage point higher than forecast but the same as in August.

The move in inflation was tilted towards services prices, which increased 0.3%, while goods prices decreased 0.1%, the fourth outright deflation figure in the past five months for the category. Housing prices eased off their pace, rising 0.3%. Energy goods and services fell 2%.

The report comes with markets betting heavily that the Fed will cut its benchmark short-term borrowing rate when it meets next week. In September, the Fed slashed the rate by a half percentage point, a move virtually unprecedented during an economic expansion.

Policymakers have expressed confidence that inflation is heading back to target while at the same time showing concern over the state of the labor market despite most indicators showing that hiring is continuing and layoffs are low.

A separate report Thursday morning reinforced the notion that companies are mostly hanging onto their workers.

Initial filings for unemployment benefits totaled 216,000 for the week ending Oct. 26, a decrease of 12,000 from the previous period’s upwardly revised level, according to the Labor Department. The total was also below the 230,000 forecast.

Despite worries over inflation, the Commerce Department report showed income and spending held up during the month.

Personal income increased 0.3%, slightly higher than the August number and in line with expectations. Consumer spending rose 0.5%, topping the outlook by 0.1 percentage point.

In yet another data point Thursday, the Bureau of Labor Statistics reported that the employment cost index increased 0.8% in the third quarter, 0.1 percentage below forecast. On a 12-month basis, the index, which measures wages, salaries and benefits, increased 3.9%, compared to a 2.4% increase in the consumer price index.