On November 28, data released by the U.S. Department of Commerce showed that the Personal Consumption Expenditure (PCE) Price Index in October rose by 2.3% year-on-year and 0.2% month-on-month, in line with market expectations. This marks a further increase from September's 2.1%, indicating that inflationary pressures have not subsided. The core PCE (excluding food and energy prices) increased by 2.8% year-on-year, up from 2.7% in September, with a monthly growth maintained at 0.3%.
This data reinforces market concerns about the persistence and stubbornness of inflation and adds complexity to the Federal Reserve's monetary policy adjustments. Economists expect the Fed to cut rates by another 25 basis points in December, but future rate cuts are likely to be slower and more cautious.
Reasons for Inflation Rise: Dominance of Services and Core Pressures
In October, service prices rose by 0.4%, becoming the main driver of rising inflation, while goods prices only increased by 0.1%. In areas of key consumer interest such as food and energy, prices remained relatively stable. However, price pressures remain stubborn in critical areas like housing costs, rents, and mortgage expenses, making it difficult for inflation to stabilize at the Federal Reserve's 2% target.
Dan North, Senior Economist at Allianz North America, pointed out that the core PCE indicator has been stalled at a high level for six consecutive months, with 2.8% being far from the target. "Controlling inflation is not easy; it requires long-term policy and economic adjustments, and the current data are not encouraging," he added.
Trump's Tariff Plan Constitutes "Upward Risk"
Economists warn that the proposed tariff policies could further heighten inflation risks. Trump recently announced plans to impose a 25% tariff on goods imported from Mexico and Canada and an additional 10% on goods from some Asian countries. A report from Deutsche Bank economists estimates that these tariffs could increase the PCE inflation rate by 0.5% to 1.1%, directly raising consumer costs.
This policy has sparked market concerns that tariff costs will be passed on to consumers, further exacerbating the cost-of-living burden in an already high inflation environment. Economists suggest this could place greater pressure on the Federal Reserve's policy, limiting its room for rate cuts.
Strong Consumer Spending Supports Economic Growth
Despite rising inflation pressures and tariff risks, the resilience of U.S. consumer spending continues to support the economy. In October, personal income increased by 0.6%, marking the largest gain in seven months; disposable income rose by 0.7%, with a real increase of 0.4% after inflation. Consumer spending increased by 0.4% month-on-month, with a real growth of 0.1% when adjusted for inflation.
Consumer spending accounts for more than two-thirds of the U.S. GDP and is the main engine driving economic growth. Data from the Department of Commerce shows that U.S. GDP grew by 2.8% year-on-year in the third quarter, indicating the fundamental resilience of the economy.
Uncertainties in Inflation and Policy
With the rise in inflation and the potential impact of Trump's tariff policy, the economic and policy outlook for the coming months is fraught with uncertainty. The challenge for the Federal Reserve is how to balance controlling inflation with maintaining economic growth. Fitch Ratings' analysis notes, "The anti-inflation process has stalled, and the journey of future inflation will be bumpy."
In this context, markets will closely watch the Federal Reserve's decisions at its December meeting and the actual impact of Trump's tariff plan on inflation and the economy. These factors could become key variables in determining the future direction of the economy and policy.
