The inflation rate most closely watched by the Federal Reserve showed easing price pressures in October. The core inflation rate, excluding food and energy prices, dipped to 5%, with a smaller-than-expected rise from September. The Dow Jones slipped in early stock market action, following Wednesday's big rally that came as Fed chief Jerome Powell spelled out what it will take to bring rate hikes to an end. However, the S&P 500 and Nasdaq tacked on modest gains Thursday morning.
The PCE (personal consumption expenditures) price index rose 0.3% on the month. The PCE inflation rate continued to ease from June's 40-year high of 7%, slipping to 6%. Core prices, minus food and energy, rose just 0.2% on the month as the annual core inflation rate eased from 5.2%.
Wall Street had expected a 0.4% increase in the PCE price index and a 0.3% rise excluding food and energy.
Separately, the Labor Department reported that new claims for jobless benefits fell 16,000 to 225,000 in the week through Nov. 26. The number of people continuing to claim benefits rose 57,000 to 1.608 million in the prior week.
Powell Lights Fire Under Dow Jones, Nasdaq
In his Wednesday speech, Powell reiterated that the core personal consumption expenditures price index provides the best signal of where inflation is headed. At 5.x%, core PCE inflation, has moved up then down a bit, but has essentially shown no progress since the start of the year, he said.
Still, Powell acknowledged that goods inflation is subsiding. Powell also said that the inflation rate for new lease prices for renters has "fallen sharply." Once the bulk of leases are up for renewal, measures of housing inflation should begin to fall in 2023, he said.
That makes it sound like elevated inflation is on its way out, helping spark a broad rally for the Dow, S&P 500 and especially the Nasdaq on Wednesday.
Powell's Highlights New Key Inflation Rate
Yet Powell also made a case for continued tightening based on another area of concern for Fed policymakers: core services inflation excluding housing. That accounts for more than 50% of the core PCE price index, including categories such as health care, education, haircuts and hospitality.
"This may be the most important category for understanding the future evolution of core inflation," Powell said, because price changes are closely tied to wage growth. "The labor market holds the key" to inflation in this category, he said.
Core services less housing has been running a bit above 4.5%, according to a chart Powell provided. But the statistic is not isolated in the monthly PCE report.
In a Q&A, Powell elaborated that wage growth, which has been running close to 5%, needs to get down to 3.5% to be consistent with 2% inflation.
While Powell reiterated his talking point that the chronic inflation of the 1970s, which eventually gave rise to double-digit unemployment, strongly cautions against the Fed letting its guard down prematurely.
But in order to keep Fed policymakers united, as some raise concerns about overtightening, Powell is now providing a clear destination. Once wage growth slips below 3.5%, the Fed will shift to an easing bias.
That could be good news or bad news for the Dow Jones, depending on how persistent wage growth proves to be.
Dow Jones, Treasury Yields React To PCE Inflation Rate
After the PCE inflation and jobless claims reports, the Dow Jones gave up 0.3%, after Wednesday's 2.2% gain. The S&P 500 rose 0.3% and the Nasdaq composite 0.5%.
Through Wednesday's close, the Dow Jones industrial average is off just 6% from its record closing high on Jan. 4. The Dow has rallied 20.4% from its 52-week closing low on Sept. 30. The S&P 500 is still 14.9% below its all-time closing high, but has climbed 14.1% from its 52-week low. The Nasdaq is still 28.6% off its peak, but up 11.1% from its bear market closing low.
The 10-year Treasury yield fell 8 basis points to 3.62%, near a two-month low.
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