Economy

Key Inflation Gauge Lower Than Expected Ahead of Fed Meeting

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Dec 5, 2025

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Government data released Friday showed a key inflation measure was lower than analysts' expectations for September. The core personal consumption expenditures (PCE) price index, a metric watched by the Federal Reserve, rose 2.8% on an annual basis, according to the Commerce Department. The report, which was delayed by a government shutdown, is the last major inflation data Fed policymakers will review before their interest rate decision next week.

On a monthly basis, the core PCE index, which excludes food and energy, increased by 0.2%, the Commerce Department's report stated. The headline PCE index, including all items, was up 0.3% for the month and also 2.8% year-over-year. The data also showed that personal income grew by 0.4% and consumer spending rose by 0.3%, while the personal savings rate held steady at 4.7%.

Following the release, stock markets added to their gains, and expectations for an interest rate cut by the Federal Reserve remained high. According to the CME Group's FedWatch tool, the probability of a quarter-percentage-point rate reduction at the upcoming meeting stood at 87.2% after the report. One investment strategist, Scott Helfstein of Global X, stated that the data could provide justification for the Fed to cut rates.

Other recent economic indicators have presented a mixed picture. A division reportedly exists among Federal Reserve policymakers regarding future rate adjustments. While a University of Michigan survey was said to show improved consumer sentiment in early December, labor market data has been varied, with some private figures showing a rise in layoffs while separate Labor Department data indicated a drop in initial unemployment claims last week.

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Perspective by Claude

• The Federal Reserve's preferred inflation metric is lower than expected. The core personal consumption expenditures (PCE) price index, which the Fed watches closely, rose 2.8% on an annual basis, a figure below what analysts had anticipated. The monthly increase was just 0.2%, suggesting that inflationary pressures are moderating, which is a key condition for considering a rate cut.

• Financial markets are signaling strong support for a rate reduction. Following the release of the inflation data, stock markets saw gains, and expectations for an interest rate cut surged. According to the CME Group's FedWatch tool, the probability of a quarter-percentage-point rate reduction at the upcoming meeting stood at 87.2%, and one investment strategist stated the data provides justification for such a move.

• Consumer fundamentals like income and spending appear stable. The same report showed that personal income grew by 0.4% and consumer spending rose by 0.3%, indicating a resilient consumer base. This, combined with a separate survey said to show improved consumer sentiment, suggests the economy is on solid footing and can absorb a rate cut without triggering instability.

How it may affect me

As a U.S. reader:

• A potential interest rate cut could soon make it cheaper to borrow money for major purchases like homes and cars, or to carry a credit card balance.

• Your investment or retirement accounts may see short-term gains, as stock markets rose on the news. However, interest rates on savings accounts could potentially decrease.

• The health of the job market remains uncertain, as the article cites conflicting data on layoffs and unemployment claims, making future economic stability unclear.

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