The lower-than-expected producer inflation report released on Friday should offset some of the upside surprises from the consumer inflation data released on Thursday.
According to the Bureau of Labor Statistics, final demand inflation was unchanged in September, while the core reading grew more slowly at 0.2%. As a result, the year-ago numbers were 1.8% for all items and 2.8% for the core reading.
These metrics imply that the Federal Reserve’s preferred gauge of inflation, the personal consumption expenditures index, most likely grew at 0.2% for both the overall and core indicators in September.
That would bring the year-over-year PCE inflation for all items to 2.1%, the lowest since February 2021.
Such a reading for PCE inflation would be a sign that the Fed has achieved a soft landing, despite all of the concerns over a growth scare, hard landing, or no-landing scenario.
The only concern is the core number, which would be around 2.6% on a year-ago basis—slightly firmer than what we would like to see. But it should not change the Fed’s rate calibration this year, certainly not in November, with a 25-basis-point cut to maintain a gradual transition toward normalization.
Read more of RSM’s insights on inflation, the economy and the middle market.
Underneath the top line, the drop in producer inflation was driven largely by energy prices, which fell 2.7% on the month. Slower trade services, a proxy for wholesale and retail margins, were also a key reason.
As we have argued for quite a while now, because shelter remains a big part of the gap between the current level of inflation and the target level, without including the shelter component, producer price inflation has remained consistently below the 2% target—another reason why we believe that a soft landing has been achieved.
