As the presidential race enters its final stretch, shaped in part by frustration over high prices, the government reported on Thursday that a key inflation gauge closely monitored by the Federal Reserve is nearing pre-pandemic levels.
According to the Commerce Department, prices rose by 2.1% in September compared to the previous year, down from a 2.3% increase in August. This brings inflation close to the Fed’s 2% target and in line with 2018 levels, before pandemic disruptions fueled rapid price increases.
However, some inflation pressures remain. Excluding volatile food and energy costs, core inflation held at 2.7% in September for the third month in a row, with a slight monthly increase from August. Although core prices remain slightly above the Fed’s preference, the recent trend suggests a cooling in inflation, supporting predictions that the Fed will lower its key interest rate by a quarter-point at its meeting next week.
“We’re essentially seeing the ‘soft landing’ scenario that many hoped for,” said Gregory Daco, chief economist at EY, describing an outcome where inflation is tamed without causing a recession. “Consumer spending remains resilient while inflation aligns with the Fed’s goals.”
The government also released the employment cost index on Thursday, showing wages and benefits increased by just 0.8% in the third quarter — the slowest growth in three years. Annual pay gains of 3.8% align with the Fed’s inflation target, Daco noted. While wage growth can benefit workers, it risks spurring inflation if businesses respond by raising prices.
This news comes days before an election in which voters are concerned about the economy, with prices still almost 20% higher than four years ago. Candidates have offered contrasting solutions: former President Donald Trump blames the current administration’s energy policies and has pledged to “eliminate inflation,” while Vice President Kamala Harris promises to curb price gouging on essentials and lower healthcare costs. Economists warn, however, that Trump's tariff plans could increase prices, while Harris' policies on price controls may offer only modest relief.
Thursday’s report also indicated that Americans remain confident enough in their financial standing to keep spending, with consumer expenditures up 0.5% from August to September, helping the economy grow at a robust pace last quarter. However, incomes rose more modestly, by 0.3%, prompting Americans to dip into their savings, reducing the savings rate to 4.6% from 4.8% in August.
On a monthly basis, overall prices edged up 0.2% in September, slightly above the 0.1% gain in August. This inflation gauge, known as the personal consumption expenditures price index (PCE), is preferred by the Fed due to its adaptability to changing consumer spending habits. Unlike the Consumer Price Index, PCE accounts for shifts such as consumers switching to lower-cost brands during inflationary periods.
Fed Chair Jerome Powell signaled confidence in late August that inflation is slowing. This easing has prompted the Fed to cut interest rates, including an outsized half-point reduction last month. More cuts are expected in November and possibly December, though signs of a stronger labor market — such as September’s job growth rebound and a drop in unemployment to 4.1% — have raised questions about the pace of future cuts.
Economists will closely watch Friday’s jobs report for additional insight into the labor market, which could be affected by Hurricanes Helene and Milton, potentially complicating the data with short-term job losses. This report will be the last major economic release before Election Day.