Fed’s Key Inflation Measure Cools, Personal Incomes Top Estimates

Despite consumers’ assessment of economic conditions, new survey data suggest they have become more confident about the economy.

Shoppers on Black Friday at a mall in Bethesda, Md., on Nov. 28, 2025. Madalina Kilroy/The Epoch Times

The Federal Reserve’s preferred inflation gauge cooled unexpectedly in September while Americans’ incomes outpaced economists’ forecasts.

Inflation in the core personal consumption expenditures (PCE) price index—excluding volatile food and energy—slipped to 2.8 percent from 2.9 percent in August, according to the Bureau of Economic Analysis on Dec. 5. Economists had expected the measure to hold at 2.9 percent.

On a monthly basis, core PCE rose 0.2 percent, in line with market projections.

Headline PCE inflation ticked up to 2.8 percent year over year from 2.7 percent the prior month, while monthly PCE climbed 0.3 percent, also matching expectations.

Fed officials place greater emphasis on PCE than on the consumer price index. PCE inflation is updated more frequently and is broader, concentrating on both urban and rural households.

Policymakers also focus on the core measure because it can be a better indicator of long-term inflation trends. Additionally, energy and food prices are greatly influenced by market dynamics rather than monetary policy.

PCE data, meanwhile, also revealed that personal incomes rose 0.4 percent, topping the market consensus of 0.3 percent. Personal spending jumped 0.3 percent, in line with expectations.

The bureau’s PCE report for September was delayed due to the federal government shutdown, which suspended data collection and reporting efforts.

The next batch of inflation data will be released on Dec. 18, when the Bureau of Labor Statistics publishes the November consumer price index (CPI) report.

Estimates suggest the annual inflation rate will hold steady at 3 percent, according to the Cleveland Federal Reserve’s Inflation Nowcasting model.

Despite consumers’ grim assessment of current economic conditions in recent months, new survey data suggest they have become more confident about the U.S. economy heading into the holiday season.

The preliminary December University of Michigan’s Consumer Sentiment Index ticked up to 53.3, higher than expected, from 51 in November—the first increase in five months.

Consumers’ one-year inflation outlook declined to 4.1 percent from 4.5 percent. Five-year inflation expectations slipped to 3.2 percent from 3.4 percent.

This could be welcomed news for the U.S. central bank.

Job Market Outweighs Inflation

While Federal Reserve officials have expressed divergent opinions on the economy and the path of monetary policy, investors and market watchers overwhelmingly expect the Fed to lower interest rates by a quarter point at next week’s two-day policy meeting.

The futures market anticipates a 90 percent chance of a rate cut, signaling the view that employment conditions are more important than inflation right now.

“The Fed isn’t happy to see inflation overshooting their target for a fourth year running,” Bill Adams, chief economist at Comerica Bank, said in a note emailed to The Epoch Times.

“But Fed policymakers are likely to see larger risks to the job market than to inflation.”

A growing chorus of Fed officials has warned of deteriorating employment conditions.

Federal Reserve Chair Jerome Powell arrives to speak at a news conference following the Federal Open Market Committee (FOMC) meeting in Washington on Oct. 29, 2025. Madalina Kilroy/The Epoch Times

But mixed employment data could make it more challenging to assess the health of the job market.

Weekly jobless claims fell to their lowest levels since September 2022 last week, according to the Department of Labor. Recurring jobless claims also declined for the second straight week.

At the same time, payroll processor ADP reported that the private sector eliminated 32,000 jobs in November. Planned job cuts declined 53 percent from October to 71,321, data from global outplacement firm Challenger, Gray, and Christmas revealed.

The challenge for the Fed is that neither the November jobs report nor new inflation figures will be released until after the December Federal Open Market Committee meeting.

But Adams does not think the central bank will be taking any chances.

“Amid signs of downside risks to the employment outlook, the Fed is increasingly likely to cut the federal funds target another quarter percent at their subsequent decision on January 31,” he said.

“That would lower the target rate a full percentage point from where it stood on Labor Day.”

Stocks were up at the end of the trading week as investors absorbed the assortment of economic releases.

The blue-chip Dow Jones Industrial Average and the tech-heavy Nasdaq Composite Index added more than 100 points. The broader S&P 500 inched closer to an all-time high, rising about 0.5 percent.