US inflation slows down but still too high

Although prices remained unacceptably high in September, a slowdown in wage growth points to a possible weakening of the situation, a new set of inflation data released on Friday showed. This is a welcome development for the Fed, which is fighting to reduce the highest inflation in 40 years.

In accordance with the latest report from the Bureau of Economic Analysis, the Personal Consumption Expenditures Index (PCE), which measures the prices consumers pay for goods and services, increased by 0.3% over the past month, but remained flat at 6.2% year-on-year.

The core PCE price index, excluding food and energy price volatility and is the Fed's preferred measure of inflation, increased by 5.1% year-on-year, up from 4.9% in August but below the consensus forecast of 5.2%.

The recent data come just a few days before the Fed meets to discuss another rate hike and when Americans go to the polls to vote in the midterm congressional elections.

According to Gregory Daco, senior economist at EY Parthenon, these data confirm that the Fed still has a lot of work to do to cool demand and reduce inflation, as well as stay on track to raise rates by another 75 basis points at the November 2 meeting.

The latest PCE report showed that US citizens continue to spend beyond their means — consumer spending increased by 0.6% in September compared to August, incomes increased by 0.4%, and the savings rate fell. Even with inflation, expenses exceed income.

Tim Quinlan and Shannon Seery, economists at Wells Fargo, said that monetary policy works with a delay, but consumer spending is more or less unconcerned about high inflation and rate hikes at this stage.

Nevertheless, consumers are not necessarily optimistic about the economy and its future prospects.

According to the updated survey data, the University of Michigan consumer sentiment index for October was 59.9. This is just 10 points above the historical low reached in June.

According to surveys director Joanne Hsu, conditions for purchasing durable goods improved by 23% this month on the back of lower prices and supply constraints; 

however, business conditions expected for the year ahead deteriorated by 19%. She also added that these divergent models reflect significant uncertainty about inflation, the Fed's response and events around the world, and consumer views are consistent with an upcoming recession in the economy.

As Daco noted, in addition to the consumer sector, the broader economic picture is deteriorating.

He added that rapidly rising interest rates, persistently high inflation and increased global uncertainty are undermining business sentiment and pushing companies to make more cautious hiring and investment decisions.

And while the housing market is already buckling under the weight of rising mortgage rates, the full impact of the Fed's tightening policy has yet to be felt, he said.