The Fed's Preferred Inflation Gauge Is Nearly Back to Target

By Matt Grossman

The Federal Reserve's preferred inflation measure fell to 2.1% in September, showing the central bank has wrestled price increases nearly back to target.

Prices measured by the personal-consumption-expenditures price index rose by just under 0.2% between August and September, the latest leg of a significant cooldown in the pace of inflation. During the most dramatic spell of inflation in 2022, prices were climbing by nearly 1% a month by this gauge.

"We've been talking about a soft landing for a very long time," said David Kelly, chief global strategist at JPMorgan Asset Management. "Now you can say, 'OK, the Eagle has landed.' "

The figures didn't show that inflation has been fully tamed. Core prices, which exclude volatile food and energy costs, are still up by 2.7% over the past year. That figure has been roughly flat since May. Prices for services, 3.7% greater than a year ago, have been especially stubborn.

The data come days before a presidential election that has been defined in part by voters' exasperation with price increases over the past few years. Inflation has been declining since mid-2022, but many Americans remain intensely frustrated with sticker shock for big purchases and everyday items.

Still, higher prices haven't broadly damped their appetite to shop. Inflation-adjusted U.S. economic output grew at an annualized rate of 2.8% in the third quarter of the year, the Commerce Department said Wednesday, with consumer spending driving much of the expansion's continued strength.

The inflation data likely keep the Fed on track to cut interest rates by a quarter percentage point when the central bank's next policy meeting wraps up next Thursday. In mid-September, the central bank opted for an aggressive half-point rate cut, but resilience in the labor market and the broader economy has led several Fed officials to call for a more gradual pace of rate reductions going forward.

Friday morning's data on the labor market in October is the last remaining major economic report before next week's election and Fed meeting. Economists surveyed by The Wall Street Journal are expecting to see that unemployment held steady at 4.1%.

Write to Matt Grossman at matt.grossman@wsj.com