Personal Consumption Expenditures (PCE) – Crestone Mortgage Take
The Fed’s preferred inflation gauge, PCE, came in right on target for September. Headline PCE increased 0.3% for the month, matching expectations, and the year-over-year figure edged up from 2.7% to 2.8%.
Core PCE—what the Fed truly focuses on because it strips out food and energy—also landed exactly where markets expected. Core rose 0.2% in September, and the annual rate cooled from 2.9% to 2.8%, one-tenth softer than forecast and perfectly in line with what we anticipated yesterday.
Gasoline prices were the main source of upward pressure, jumping 3.6% on the month. But the big story, especially for Core, is shelter. Just like we saw in the CPI report, shelter finally came in tame. Overall shelter rose only 0.15%, with rents up 0.2% and Owners’ Equivalent Rent up 0.14%. This is the behavior we’ve been waiting for. While the year-over-year shelter number is still running warm at 3.7%, it should continue drifting lower as it catches up to the softer real-time rental data we’ve been seeing for months.
On a momentum basis, Core PCE continues to improve. The three-month annualized run rate eased from 2.9% to 2.6%, while the six-month measure ticked up slightly from 2.5% to 2.7%.
Looking ahead, the BEA hasn’t released the calendar date for the October report yet, but the math suggests we could see Core dip another notch to 2.7% year over year. The challenge comes later in the year—November and December 2024 were unusually low readings, making additional progress toward the Fed’s 2% target more difficult. Early 2026 should bring better traction, as higher readings from early 2025 roll out of the calculation.
Beyond the PCE data, the University of Michigan survey showed that consumers are expecting cooler inflation as well. Their 1-year inflation expectations dropped from 4.5% to 4.1%—the second-lowest of the year—and 5-year expectations eased from 3.4% to 3.2%, the lowest of the year. Consumers may not pin down inflation precisely, but directionally this is exactly what the Fed wants to see.
Bottom line: Between Wednesday’s ADP report showing 32,000 job losses in November and today’s softer PCE reading, the runway is clear for the Fed to cut rates by 25 bps next Wednesday. The cut may come with a hawkish tone, so the statement, projections, and press conference will be key—but the path to lower rates is opening.