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Prices for Goods and Services Increase Beyond Expectations

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In September, prices for goods and services increased by 0.4 percent for the second consecutive month, casting doubt on the idea that the Federal Reserve's rate increases are still controlling inflation.

It was anticipated that the personal consumption expenditure price index would decline slightly from the previous month.

The index has increased by 3.4 percent over the past year. According to data released on Friday by the Commerce Department, that is unchanged from the August reading. Since President Joe Biden's inauguration in early 2021, PCE inflation has not been below two percent, according to the Federal Reserve.

The Fed's assertions that the rate increases from March 2022 to July 2023 are still lowering inflation are called into question by the ongoing rate of inflation. The Commerce Department reported on Thursday that the economy expanded at an annual rate of 4.9 percent, which was much faster than anticipated. The claim that the stance of monetary policy is significantly restrictive or the rate of growth at which it is occurring are likely at odds with declining inflation.

In June 2022, the PCE price gauge reached a monthly high of 0.9 percent, the quickest rate of price increases since 2005. The PCE price index rose 7.1 percent year over year in June 2022, the worst inflation rate since 1981.

The rate of monthly price increases decreased from 0.6 percent in January to 3.1 percent in February of this year. This was a much-needed break from the spike in inflation from the previous year, which was thought to be an indication that the economy was being pressured by prices due to the Fed's monetary tightening. The monthly inflation rate fluctuated between three and one percent during the next five months. However, price increases spiked back up to 0.4% in August, sparking worries that the impact of the Fed's rate hikes may have lessened.

The PCE price index's core component, which excludes the cost of food and energy, increased by 0.3%, which is the fastest rate of core price inflation since April. Even though it was significantly higher than the 0.1 percent increase in August, the result was as expected. As predicted, and down from 3.8 percent in the previous month, the 12-month gain came in at 3.7 percent.

At their monetary policy meeting next week, Fed officials will not likely be forced to raise interest rates due to the increase in inflation. Rates are likely to remain unchanged at the 5.25 to 5.50 percent range set back in July, according to indications from officials. However, if inflation keeps up this pace, the Fed may be under pressure to raise its benchmark target at its December meeting.

The Federal Reserve released a summary of its members' economic projections following the September meeting of the Federal Open Market Committee. It revealed that officials' median expectations were for core PCE inflation to reach 3.7 percent and 12-month PCE inflation to drop to 3.3 percent by year's end. According to the projections, officials do not anticipate that inflation will drop to the two percent target until either late 2025 or early 2026.

Prices in the service sector increased by 0.5% in September, the most since January. Services other than housing and energy, a measure frequently cited as a key inflation indicator by Fed chairman Jerome Powell and other Fed officials, increased by 0.4 percent in March, up from 0.1 percent in the previous month. This so-called “super core” inflation measure is up 4.2 percent from a year ago.

Despite predictions that prices for goods would drop or stop rising as consumers shift their spending to services, prices for goods increased by 0.2 percent. Energy prices rose 1.7 percent while food prices increased by 0.3 percent. Prices for goods are up 0.9 percent from a year ago. Prices of food have increased by 2.7 percent. Energy prices have decreased by 0.1 percent year over year, but they are still slightly below the highs reached last summer.

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