PCE: Income, Spending, and Inflation Rise in October as the Fed Monitors Gradual Trends

October’s economic data paints a picture of rising income, spending, and inflation, suggesting a resilient consumer base amid steady economic growth.

Personal income and spending rose more than expected, while inflation readings, though aligned with forecasts, showed no signs of disinflation, signaling a steady economic environment likely to influence Federal Reserve policy in the coming months.

Income and Spending Growth Exceed Expectations

Personal income increased 0.6% month-over-month in October, double the expected 0.3% gain and up from September’s 0.3% rise. This robust growth was bolstered by a 0.5% increase in wages and salaries, reflecting continued strength in the labor market. Real disposable income rose by 0.4% month-over-month and 2.7% year-over-year, indicating solid purchasing power among consumers.

Personal spending increased by 0.4%, outperforming the 0.2% consensus estimate. September’s spending figure was also revised upward to 0.6% from 0.5%. Real personal spending, adjusted for inflation, edged up 0.1% month-over-month and 3.0% year-over-year, showing steady consumption trends despite inflationary pressures.

Inflation Metrics Show Resilience but No Disinflation

The PCE Price Index, the Federal Reserve’s preferred inflation gauge, rose 0.2% month-over-month in October, in line with expectations, pushing the year-over-year rate to 2.3% from 2.1% in September. The core PCE Price Index, which excludes volatile food and energy prices, rose 0.3% month-over-month and 2.8% year-over-year, slightly higher than September’s 2.7%.

The absence of disinflationary trends in these metrics suggests the Fed may take a measured approach to lowering interest rates. While inflation remains relatively contained, the steady upward movement in service prices, which rose 0.4% month-over-month and 3.9% year-over-year, highlights persistent pressures in this sector.

Goods prices offered a slight reprieve, with the PCE Price Index for Goods declining 0.1% month-over-month for the third consecutive month, leaving it down 1.0% year-over-year. However, this decline was less pronounced than September’s 1.2% year-over-year drop.

Savings and Other Income Components Provide Stability

The personal savings rate increased modestly to 4.4% in October from 4.1% in September, reflecting a slight uptick in consumer prudence. This improvement, coupled with income gains, provides a buffer for potential future economic uncertainties.

Other income components, such as rental income and personal dividend income, also contributed to overall income growth. Personal interest income rebounded sharply, rising 0.6% month-over-month after a 0.5% decline in September. Dividend income surged 1.3%, reflecting stronger corporate profitability and capital market performance.

Implications for Federal Reserve Policy

The October data presents a mixed bag for Federal Reserve policymakers. While income and spending gains underscore economic resilience, the lack of disinflation in core inflation metrics suggests caution in pursuing aggressive rate cuts. The Fed is likely to monitor these trends closely, focusing on inflation within the services sector, which continues to exert upward pressure on price levels.

Outlook and Final Thoughts

The October report reinforces the narrative of a stable and resilient U.S. economy. Consumers continue to spend at healthy levels, supported by rising wages and disposable income. Inflation, while not accelerating sharply, remains sticky, particularly in services, indicating that the economy is not yet in a position for significant monetary easing.

For now, the data supports a scenario of cautious optimism. The Federal Reserve is expected to maintain its gradual approach to policy adjustments, balancing the need to support growth while keeping inflation expectations anchored.

As the economy enters the holiday season, these dynamics will remain critical in shaping the outlook for growth, inflation, and monetary policy into the new year.