The Fed’s key measure of inflation rose 0.2% in October, less than expected

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Inflation in October rose about in line with estimates, sending a signal that price increases may at least be sustainable, the Commerce Department said Thursday.

The core personal consumption expenditures price index, a gauge that excludes food and energy and is the Federal Reserve’s favorite, rose 0.2% for the month and was up 5% from a year ago . The monthly increase was lower than the Dow Jones estimate of 0.3%, while the annual gain was in line.

The gains also represent a reduction from September, which saw a monthly increase of 0.5% and an annual gain of 5.2%.

Including food and energy, core PCE rose 0.3% on the month and 6% on an annualized basis. The monthly increase was the same as in September, and the annual gain was a step down from the 6.3% pace.

The department also reported that personal income jumped 0.7% for the month, well ahead of the estimate of 0.4%, and spending rose 0.8%, as expected.

In another key report, a broad measure of manufacturing activity posted the lowest reading in two and a half years for November.

The ISM Manufacturing Index recorded a reading of 49%, representing the level of businesses reporting expansion for the period. The reading was 1.2 percentage points below October and the lowest since May 2020, in the early days of the Covid pandemic.

A decline in order stocks and imports were the biggest drags on the index. The closely watched price index was down 3.6 points to 43%, indicating that inflation is slowing, while the earnings index was also down, down 1.6 points to 48.4% in contraction area.

Markets were mostly lower after the morning data, with the Dow Jones industrial average down more than 250 points in early trading while the S&P 500 and Nasdaq Composite posted smaller losses.

“This morning’s data was a goldilocks report because it showed core inflation continuing to decline,” said Chris Zaccarelli, chief investment officer for the Independent Advisor Alliance. “If inflation continues to decline , markets will continue to go higher, as investors decide that the Fed will not need to raise rates as high, or keep them high as long, as previously expected.”

While the Fed includes a wide range of measures to measure inflation, it prefers the PCE index because it takes into account changes in consumer behavior such as substituting cheaper products for more expensive ones. That’s different from the consumer price index, which is a crude measure of price changes.

Policymakers view headline inflation as a more reliable measure because food and energy prices tend to fluctuate more than other items.

In other economic news Thursday, the Labor Department reported weekly jobless claims at 225,000, a decline of 16,000 from the previous week and below the estimate of 235,000.

Another jobs report from lodging firm Challenger, Gray & Christmas indicated that planned layoffs increased 127% month over month in November and were up 417% from a year ago. Even with the big increase, the company noted that the total number of layoffs so far is the second lowest ever in a data set that goes back to 1993.

The data comes at a crucial time for the Fed, which is in the midst of a campaign to raise interest rates in an effort to bring down inflation.

In a speech on Wednesday, President Jerome Powell said he saw some signs that price increases are slowing but said he needs to see more consistent evidence before the central bank can change gears on policy. He said, however, that he believes the rates of increase may begin to moderate, perhaps as early as December.

“The reality is that the path forward for inflation remains very uncertain,” Powell said.

PCE data showed that the numbers remain volatile. Goods inflation rose 0.3% for the month after declining in the previous three months, while services inflation increased 0.4%, down from two consecutive increases of 0.6%. Economists have been looking for a shift back to a more services-based economy after strong demand for goods played a major role in the rise in inflation in 2021.

Food inflation increased by 0.4% and prices of energy goods and services rose by 2.5%.

The Fed is closely monitoring the jobs market for more signs of cooling inflation.

Jobless claims had been trending slightly higher, and the number of ongoing claims rose by 57,000 to 1.61 million, the highest level since February.

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