Inflation in the United States rose again in October, surpassing expectations, and raising concerns over the persistence of high prices and the economic agenda of President-elect Donald Trump. The Personal Consumption Expenditures (PCE) index, a key measure closely watched by the Federal Reserve, increased by 0.2% in October. The core PCE index, which excludes volatile food and energy costs, rose by 0.3%. This brings the annual inflation rate to 2.3%, with core inflation at 2.8%. Both figures align with analysts’ forecasts, although they represent a slight uptick from September’s 2.1% rate.
While the Consumer Price Index (CPI) is more commonly referenced, the Federal Reserve pays particular attention to the PCE, as it offers a broader measure of price changes across the economy. Despite inflation having significantly reduced from its peak in the summer of 2022, it remains stubbornly high for certain items, particularly shelter and insurance, which have continued to drive up the overall rate.
Alongside the inflation report, a strong economy continues to signal positive growth. The third-quarter GDP report confirmed that the economy expanded by 2.8%, in line with previous estimates and market expectations. Sales of pending homes also rose by 2% in October, signalling continued strength in the housing sector. Chris Rupkey, Chief Economist at fwdbonds.com, stated that the economy is showing “a lot of steam,” highlighting job layoffs as minimal and GDP growth approaching 3%, which he believes is likely the sustainable pace for now.
Despite the positive economic signals, the Federal Reserve has been cautious about lowering interest rates too quickly. The central bank reduced rates by 0.25% in November, following a surprise 50-basis point cut in September. However, the minutes from the Fed’s meeting revealed that officials were divided over whether further cuts were necessary, with some members concerned that aggressive easing could undermine efforts to tackle inflation. These minutes confirmed that the Fed was mindful of balancing the risks of slowing the economy by cutting rates too soon against the potential for stifling inflation.
Fed Chairman Jerome Powell and other officials have emphasised that although the economy remains resilient, inflation remains a challenge. For now, the Federal Reserve appears content with its gradual approach to rate cuts, with analysts now uncertain whether the Fed will make further reductions in December as initially expected.
Political shifts are also influencing the economic outlook, particularly as President-elect Trump begins to outline his economic policies ahead of his inauguration in January. On Monday, Trump announced plans to impose 25% tariffs on goods imported from Canada and Mexico, along with an additional 10% tariff on Chinese imports, all set to take effect shortly after he takes office. These tariffs are framed as responses to the failure of these nations to address issues such as illegal immigration and the influx of synthetic opioids, like fentanyl, from China.
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In response, both Mexico and China have indicated that they may retaliate against such measures. Canada, meanwhile, has expressed interest in negotiations to avert a trade confrontation. These trade policies could spark inflationary pressures, particularly in goods sectors, and may also complicate the Fed’s approach to interest rates. Investment firm Lazard suggested in a report that the Fed may slow the pace of rate cuts over the next 18 to 24 months, driven by policies from Trump’s administration such as tax cuts, increased tariffs, and tighter immigration controls.
In a further sign of Trump’s economic priorities, he filled two key positions in his incoming administration on Tuesday. Former chairman of the Council of Economic Advisers, Kevin Hassett, was selected to head the National Economic Council, and Jamieson Greer was appointed as U.S. Trade Representative. Greer, who served as chief of staff to former trade negotiator Robert Lighthizer, is expected to play a key role in shaping the administration’s trade policy moving forward.
As the economy continues to grow and inflation persists, the Federal Reserve and the Trump administration will have to navigate a challenging economic landscape. With inflation pressures not yet fully under control and new trade policies on the horizon, the path ahead for both the U.S. economy and monetary policy remains uncertain. As analysts and investors closely watch these developments, the focus will remain on whether the economy can sustain its current pace while inflation remains in check.
