While the cumulative effect of inflation has had a pronounced influence on the U.S. economy, the view in relative terms is getting progressively better. The annual pace of price increases is nudging ever closer to the Federal Reserve's 2% target , a trend likely to be exemplified Thursday when the Commerce Department releases its own inflation numbers at 8:30 a.m. ET. Judging by the personal consumption expenditures price index, inflation was expected to run at just a 0.2% rate in September and 2.1% from a year ago, according to Dow Jones estimates. Though it follows a dashboard of indicators, the Fed focuses on the PCE measure for inflation as it is considered a broader gauge than the Labor Department's consumer price index and adjusts for consumer behavior such as substitution of less-expensive goods for costlier alternatives. If those projections are correct, they could give the Fed further impetus to cut its benchmark interest rate at the two-day policy meeting that concludes Nov. 7. "Another strong quarter of GDP growth and close-to-target quarterly inflation reading will be welcomed by the Fed stuck between balancing the risks of inflation and the labor market," Citigroup economist Alice Zheng said in a note Wednesday. Indeed, the Commerce Department reported Wednesday that real GDP in the third quarter rose at a seasonally adjusted 2.8% pace, a small step below the 3% rate in Q2 and 0.3 percentage points shy of the Dow Jones estimate. Within the GDP report, the PCE rate for the quarter was just 1.5%, suggesting that the battle has been won. However, there is more to the picture. Core inflation, which excludes food and energy costs, has proved more resilient. The estimates for September are 0.3% monthly and 2.6% annually, largely because energy prices have been tumbling and bringing down the headline rate. Though Fed officials of late have been a little less focused on core inflation because of the influence that housing has exerted, they generally consider it a better long-range indicator. While the market is still betting heavily on more rate cuts this year, the Fed likely will be cautious. The inflation trends as coupled with strong economic growth speak "in favor of a higher terminal rate," wrote Shruti Mishra, U.S. and global economist at Bank of America. "We don't think strong activity will deter the Fed from cutting this year, but the case for pausing or even stopping rate cuts will get stronger in 1Q if [Treasury] rates are closer to 4% and the data flow remains as robust as it has been in recent weeks."
