The core Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, indicated a lower-than-expected annual rate of 2.8% in September.
This long-awaited data point, released by the Commerce Department’s Bureau of Economic Analysis (BEA), strongly reinforces expectations that the Fed will opt to lower interest rates at its monetary policy meeting next week.
The report’s release was significantly delayed—originally scheduled for late October—due to the government shutdown, which had halted all data collection and economic reporting for over 40 days. Despite the data being backward-looking, it is the final piece of inflation evidence the FOMC will receive before making its rate decision, granting it immense significance.
PCE Readings and The Fed’s Rationale
The September core PCE annual rate of 2.8% was a slight deceleration from 2.9% in August and was 0.1 percentage point below the Dow Jones consensus forecast. The monthly core PCE rise of 0.2% was in line with expectations.
| Measure | September Annual Rate | Monthly Change | Comparison to Expectations |
| Core PCE (Excluding Food & Energy) | 2.8% (Lowest since May) | 0.2% | Annual rate lower than 2.9% consensus |
| Headline PCE (All Items) | 2.8% (Highest since April) | 0.3% | In line with 2.8% consensus |
Why the Fed Prefers PCE Over CPI
Federal Reserve officials use PCE as their primary policy tool for inflation targeting (2% long-term goal) over the better-known Consumer Price Index (CPI) for several key methodological reasons.
The PCE index’s weighting of goods and services is updated monthly, which better captures how consumers substitute cheaper goods for more expensive ones when prices rise. The CPI only updates its weights annually.
PCE is a more comprehensive measure because it includes expenditures made on behalf of consumers by third parties, such as employer-provided healthcare and government programs. The CPI only tracks out-of-pocket expenses.
PCE places a greater emphasis on healthcare and a lower emphasis on housing costs compared to the CPI, which is often seen as providing a clearer picture of underlying inflationary pressures.
The details of the report revealed a divergence in price pressures between goods and services. Goods prices rose 0.5% on the month, accelerating sharply. This is largely attributed to the continued impact of President Donald Trump’s tariffs working their way through the economy.
Services prices were up just 0.2% (a step down from 0.3% in August). The main contributors to the services increase were health care and housing, and utilities (led by rent).
Food prices rose 0.4%, while energy prices were up 1.7%, driving the slight acceleration in the Headline PCE rate.
The data also showed that Personal Income rose 0.4% (a beat over the forecast), while consumer spending was up 0.3% (a slight miss). Real consumption, when adjusted for inflation, was flat for the month, which, alongside the unchanged personal savings rate of 4.7%, signals a loss of momentum in household demand after a resilient summer.
Path to a Rate Cut
The softer Core PCE data, particularly the annual decline from 2.9% to 2.8%, strengthens the position of the FOMC faction that supports additional rate cuts to head off potential weakness in the labor market.
The odds of the Fed cutting the benchmark interest rate by a quarter percentage point when it meets next week held firm at 87.2%, according to the CME Group’s FedWatch tool.
While labor market indicators show a slow pace of hiring, a separate report on Friday revealed consumer sentiment improved more than expected to start December (the University of Michigan survey rose to 53.3). Crucially, consumer one-year inflation expectations dropped to 4.1%, easing policymakers’ concerns about the public’s view of future prices.
The combination of cooling core inflation, slowing momentum in consumer spending, and contained long-term inflation expectations sets a clear stage for the Fed to deliver a widely anticipated rate reduction next week.
