PCE Price Index Preview: Core Inflation Eases, But Geopolitics Creates Uncertainty

The Bureau of Economic Analysis will release the Personal Consumption Expenditure and the price index at 8:30 ET on Friday. Economists polled by Bloomberg estimated core inflation to decline further.

■ Accommodation prices fell in September

The decline in accommodation costs might be the main factor driving the decline in the core PCE price index in September, which may mean that the Fed's continuous increase in interest rates is finally having an effect on the housing market.

The nationwide median sale price of existing homes was $394,300 in September, down from August, and the average price of new home sales fell to $503,900 last month.

The decline in housing prices and the increase in vacancy rates have made it possible for further declines in rental prices, driving the decline in core inflation.

■ Import prices show falling prices for various commodities

A strong dollar means Americans can buy imported goods at a lower cost. Bureau of Labor Statistics’ latest release showed food prices declined by 1.7%, building materials prices decreased by 0.7%, and metal & prefabricated products prices declined by 1.2% in September. Cathy Woods shed light on how the weakening Chinese Yuan helped to alleviate inflation in the US, tweeting, "China is exporting deflation in a more profound way than I believe many economists and strategists appreciate.”

■ The Israeli-Palestinian conflict creates uncertainty about inflation outlook

The Middle East accounts for more than 30% of the world's oil production, and any further conflict will create the risk of rising oil prices. Although the Biden administration attempts to actively mediate between the two sides, further actions by Israel and how Iran responds are the next issues affecting the Middle East supply chain.

The market predicts that the Federal Reserve will not raise interest rates at the November FOMC meeting. Federal Reserve Chair Jerome Powell also suggested a recent run-up in long-term Treasury yields, if they persist, could lessen the need for further hikes “at the margin.”

However, global central banks still retain concerns about geopolitical conflicts. ECB President Christine Lagarde said on Wednesday that the fight to curb rising consumer prices is not over yet and she is paying attention to oil price trends to prevent the Israel-Palestine conflict from having an impact on inflation:"Energy prices are the main driver of inflation in 2022 and we know how much expensive energy prices cost and how people suffer."