Investors Optimistic as Rising Inflation Falls Mostly In-Line with Expectations

There were few surprises in today’s plethora of U.S. economic data on Friday as the Fed prepares to enact its sixth interest rate increase of the year at its two-day policy meeting on November 1-2. The Fed has been raising rates since March. Next week’s 75-basis point rate hike will bring the total of rate increases to 3 percentage points thus far.

Personal Spending, Income Showed Inflation May Be Cooling

Today’s reports come on the heels of Thursday’s surprisingly strong U.S. Gross Domestic Product report. GDP data showed that the U.S. economy grew by 2.6% in the third quarter. That was above the 2.3% growth predicted by economists in a Dow Jones survey.

More importantly, the Advance GDP Price Index came in at 4.1%, below the 5.3% forecast and the upwardly revised 9.0% figure from the previous month. This data suggested inflation may be starting to ease.

On Friday, personal spending and income figures showed that inflation is cooling slightly and that consumer spending is strong.

Inflation Still High

However, an economic gauge that the Federal Reserve follows closely showed that inflation stayed strong in September but mostly within expectations, the Bureau of Economic Analysis reported Friday.

The core personal consumption expenditures price index (PCE) increased 0.5% from the previous month and accelerated 5.1% over the past 12 months, the report showed. The monthly gain was in line with Dow Jones estimates, while the annual increase was slightly below the 5.2% forecast.

Another report showed that employment costs rose 1.2% for the third quarter, in line with estimates, according to the Bureau of Labor Statistics. On an annual basis, the employment cost index increased 5%, slightly lower than the 5.1% pace in the second quarter.

Lowering Inflation Still Fed’s Top Priority

These are important developments since lowering inflation has been a top priority for the Federal Reserve, and the central bank has been hiking interest rates to do so. Meanwhile concerns about the speed and height of the hikes leading the U.S. economy into a recession have been spreading amongst investors ahead of the Federal Reserve’s meeting next week.

While a 75-basis point rate hike is widely expected from the central bank, uncertainty about its future policy and a potential slowdown of hikes at the end of the year has been growing.

Financial market traders think the Fed might downshift the pace of its rate hikes ahead. With that in mind, futures pricing Friday morning indicated a nearly 60% chance that the central bank will hike rates 0.5 percentage points in December.