As the presidential race draws to a close, a significant inflation metric watched closely by the Federal Reserve has reached its lowest level in three and a half years. According to the Commerce Department, prices rose by just 2.1% in September year-over-year, down from a 2.3% increase in August. This figure brings inflation close to the Fed’s 2% target, aligning with levels last seen in 2018, just before the pandemic. Month-over-month, prices saw a 0.2% rise from August to September, following a 0.1% increase from July to August. Despite this cooling inflation trend, public frustration with the economy remains as average prices are nearly 20% higher than four years ago.
Political Stances on Inflation
Inflation has emerged as a key talking point in the election, with former President Donald Trump attributing the rise in prices to the Biden-Harris administration’s energy policies, promising inflation would “vanish completely” if he were to be re-elected. Vice President Kamala Harris, on the other hand, has outlined measures to prevent price gouging on essential goods and reduce costs in child care and health care. Economists have expressed doubt over Trump’s claims, warning that his proposed tariffs and immigration policies might worsen inflation. Meanwhile, Harris’ initiatives are expected to have a limited impact on overall inflation.
Current Inflation Context
After reaching a high of 7.1% in June 2022 as the economy bounced back from pandemic-induced shortages, the personal consumption expenditures (PCE) price index—a key inflation gauge—shows a steady inflation decline over the past two years. This trend reflects improved supply chains and the Fed’s interest rate hikes intended to curb spending and stabilize the economy.
The PCE Index vs. CPI
The Fed relies on the personal consumption expenditures (PCE) index rather than the consumer price index (CPI) for its inflation insights, as the PCE adjusts for shifts in consumer choices during inflationary periods, like opting for store brands over pricier alternatives. Notably, the PCE index often reports lower inflation than the CPI, mainly because housing costs carry a different weight in each index. Fed Chair Jerome Powell recently expressed growing optimism about controlling inflation, especially as labor market trends allowed for a half-point rate cut last month.
Future Rate Adjustments
With inflation trending downward, the Fed is expected to reduce rates further by a quarter-point in November, potentially followed by another cut in December. Yet, the job market remains resilient, showing strong hiring in September, a reduced unemployment rate of 4.1%, and significant retail sales growth last month. The economy expanded at an annual rate of 2.8% in the third quarter, driven by consumer spending. As election day approaches, the October jobs report, impacted by disruptions from Hurricanes Helene and Milton, will be the final major economic release before voters cast their ballots, likely offering further insight into the labor market’s health.
