Market Minute: September 26th, 2025 - PCE Inflation Edges Up, Supporting Expectations of an October Rate Cut
When the Fed decided to cut rates at its last meeting, significant discussion followed about the pace of future cuts and how many we could reasonably expect. Pundits have argued that the stock market’s current level, and its future performance, depend heavily on an active Fed.
Our Focus: Labor Market and Inflation
Our focus has been on data, particularly at the intersection of labor market health and inflation. At the tender age of 57, I am old enough to remember the inflation of the 1970s but young enough not to have been directly impacted. I do, however, remember the rising price of baseball cards, and I wasn’t too happy about that! For those who lived through that era, who could forget the WIN buttons—“Whip Inflation Now”? It took until the early 1980s, but once inflation was finally brought under control, economic prosperity soon followed.
Taming Inflation: Then and Now
The formula for taming inflation is not difficult to administer but can be very painful for the economy. When then-Fed Chairman Paul Volcker and his board set out to break inflation, they pushed the federal funds rate above 20%. As borrowing costs soared, economic activity slowed, and inflation was finally broken. This is, of course, an oversimplification, but it cuts to the heart of the matter. The key difference between that inflationary period and today is that in the 1970s, oil prices spiked, affecting nearly every part of the economy, whereas today energy costs are a less dominant driver of inflation.
August PCE Data
This morning, the Personal Consumption Expenditures (PCE) index was released for August, showing inflation rose 0.23% last month. That nudged the trailing 12-month inflation rate up 6 basis points, from 2.85% to 2.91%. While a slight increase, this does not suggest a reignited bout of inflation. On this basis, markets now hold a solid expectation of an October rate cut.
GDP Growth Surprises
Another point worth noting: second-quarter GDP, which measures domestic economic output, was revised upward to an annual growth rate of 3.8%. A meaningful 50-basis-point increase from the initial estimate. This marks the fastest economic expansion in two years.
Where We Stand: Inflation, Growth, and Employment
So where does that leave us? Inflation remains stubborn, not falling to the Fed’s 2.0% target, but it is also not spiraling out of control. Meanwhile, the economy continues to show surprising resilience in the face of elevated inflation. The critical factor, we believe, is employment. Companies are still trying to determine how AI will reshape their businesses and, by extension, their human capital needs. The direction of the job market will influence consumer spending and help us better understand the economy’s intermediate path.
We believe the Fed will continue balancing its dual mandate—keeping interest rates aligned with inflation while remaining supportive of the labor market. A difficult balancing act indeed!
