Core Inflation Rate Hits 2.8%, Fed May Move Toward Rate Cut in December

In the latest update to inflation data, the core personal consumption expenditures (PCE) price index, which excludes the often-volatile categories of food and energy, showed a rise of 0.2% month-over-month in September, bringing the annual rate to 2.8%. This is slightly lower than the previous month’s rate of 2.9%, suggesting a slight cooling in inflation and offering more support for a potential rate cut by the Federal Reserve.

The data, released after a delay due to the government shutdown, aligns with economists’ expectations. The PCE index is the Federal Reserve’s preferred measure of inflation, and its latest movement likely strengthens the case for the Fed to lower interest rates at their December meeting.

Why Does This Matter for the Fed’s Rate Decision?

Federal Reserve officials have indicated that the PCE index plays a critical role in their decision-making process when it comes to monetary policy. The current inflation rate, still above the Fed’s 2% target, has led to debates about the next steps. However, the September report, showing a modest decline in the core PCE and stable overall prices, likely provides the Fed with the justification needed for a rate cut.

The Fed is widely expected to approve a 25-basis-point interest rate cut in its upcoming meeting on December 13, as markets have placed an 87% probability on this outcome, according to the CME Group’s FedWatch tool. This would mark the third consecutive rate cut since the summer, and many analysts believe the Fed will use this opportunity to ease policy further, given the continued softening in the labor market and inflationary pressures.

Labor Market Concerns and Rising Tariffs Still Pose Challenges

While the inflation data gives room for a rate cut, the labor market remains a source of concern. Although the unemployment rate is relatively stable, layoff announcements have been rising. The latest figures show that over 1.17 million job cuts were announced in 2025, the highest level since the COVID-19 pandemic. This slowdown in hiring, coupled with some private-sector layoffs, presents challenges for policymakers who want to avoid further economic weakness.

Additionally, the impact of tariff-driven inflation remains a key issue for the Fed. Goods prices rose by 0.5% in September, partly due to ongoing tariff effects. These cost increases, particularly in goods, continue to complicate efforts to bring inflation back to the Fed’s target level.

Personal Income and Spending Data: A Mixed Bag

Alongside inflation figures, the latest report also highlighted changes in personal income and consumer spending. Personal income rose 0.4% in September, surpassing the expected 0.3% increase, while consumer spending grew by just 0.3%, slightly below projections. Despite the relatively modest rise in spending, this indicates that consumer confidence remains solid, even as inflation concerns persist.

The personal savings rate held steady at 4.7%, signaling that consumers are not significantly increasing their savings despite the higher costs in the economy.

Consumer Sentiment: A Positive Upswing

In a separate report from the University of Michigan, consumer sentiment for December showed an improvement, coming in at 53.3, up 4.5% from November. This exceeded expectations, providing some hope that consumers may be feeling more optimistic as the year ends. Additionally, inflation expectations also dropped, with the one-year outlook falling to 4.1%, and the five-year forecast dropping to 3.2% both the lowest levels since January 2025.

This shift suggests that consumers are becoming less concerned about inflation in the short and long term, which could support further economic stability.

What’s Next? Fed’s December Meeting Will Be Key

As the December Fed meeting approaches, all eyes are on how the central bank will respond to these mixed signals. With inflation still above target but showing signs of cooling, and concerns about the labor market and tariffs, the Fed faces a difficult decision. Rate cuts could help stimulate the economy, but inflation remains a worry. The dot plot the Fed’s updated rate projections will provide further clues on how the committee views the future of interest rates and inflation.

For now, the core inflation rate of 2.8% seems to clear the path for the Fed to act in December. While the economic challenges are far from over, this inflation reading offers the central bank a window to adjust policy in hopes of supporting growth without fueling further price increases.

Takeaway

The latest PCE inflation data for September, with its 2.8% core rate, has given the Federal Reserve the green light to continue its rate-cutting cycle. While inflation is still above the Fed’s target, the cooling trend, coupled with weakening labor market data and rising tariff impacts, points toward a need for action. With consumer sentiment improving and inflation expectations decreasing, the Fed will likely seize the opportunity to ease policy further, which may influence mortgage rates and broader economic conditions into 2026. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.