US October PCE Inflation Rises 2.3%, 'Slowing Trend Pauses'... Will Next Year's Rate Cuts Slow Down?

Core PCE Inflation Rises 2.8%, Highest in 6 Months
Previous Day's FOMC Minutes Suggest Cautious Monetary Easing
US Growth and Employment Steady... Rate Cut Pace Expected to Slow

Last month, the personal consumption expenditures (PCE) price inflation rate in the United States showed a slight increase. As the Federal Reserve (Fed) announced a cautious monetary easing stance, deflation (a slowdown in the inflation rate) has stalled, and the economy is achieving solid growth rates, leading to expectations that the pace of interest rate cuts may slow down starting next year.

Shinhwa Yonhap News

On the 27th (local time), the U.S. Department of Commerce announced that the October PCE price index rose 2.3% year-on-year. This was 0.2 percentage points higher than September's 2.1%, matching market expectations (2.3%). The PCE price index increased by 0.2% month-on-month, consistent with both September's figure and expert forecasts.

Excluding the volatile energy and food sectors, the core PCE price index, which shows the underlying trend of inflation, rose 0.3% month-on-month and 2.8% year-on-year as expected. However, the year-on-year increase was slightly higher than September's 2.7%, marking the highest level in six months since April this year. The core PCE price index is the inflation indicator most closely watched by the Fed.

The cause of the PCE price increase was service prices. The core service prices, excluding housing and energy, rose 0.4% month-on-month, the highest in seven months since March. Goods prices fell by 0.1%. Food prices remained almost unchanged, and energy prices decreased by 0.1%.

With the U.S. economy remaining robust and the core PCE price index growth rate staying in the high 2% range, there is a prospect that monetary authorities may cautiously implement interest rate cuts as previously signaled. The minutes of the November Federal Open Market Committee (FOMC) meeting released the day before stated that "participants expected it would be appropriate to gradually move toward a more neutral policy stance." It also mentioned the need to slow down or pause monetary easing if the inflation decline slows. This aligns with Fed Chair Jerome Powell's remarks on the 14th that the Fed would not rush rate cuts due to the strong U.S. economy.

Other indicators released that day also supported the signal of a strong U.S. economy. The U.S. Department of Commerce reported that the preliminary estimate of real gross domestic product (GDP) for the third quarter increased at an annualized rate of 2.8% quarter-on-quarter. Consumer spending, which rose 3.5%, the highest level this year, drove strong growth. The labor market remained stable. According to the U.S. Department of Labor, initial jobless claims for the week of November 10?16 decreased by 2,000 from the revised previous week to 213,000. This was the lowest level in seven months since April and 2,000 below expert expectations (215,000).

Wall Street currently sees a high possibility that the Fed will implement a 'small cut' (0.25 percentage point interest rate reduction) next month. Steven Stanley, Chief U.S. Economist at Santander US Capital Markets, said, "We expect the Fed to cut rates in December," adding, "(The current rate) is still quite far from the neutral rate level, so they will want to keep moving forward." According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on that day priced in a 66.5% chance of a 0.25 percentage point rate cut at the December FOMC regular meeting and a 33.5% chance of rates remaining unchanged.

However, there is growing weight to the view that the Fed may slow the pace of rate cuts starting next year. Brett Kenwell, U.S. investment analyst at eToro, analyzed, "Overall inflation is moving in the desired direction, but if further completion is lacking, investors may need to reassess their bets on future rate cuts."