PCE, a Key Inflation Measure, Sped Up in October

Inflation has been stubborn in recent months. Now, President-elect Donald J. Trump’s tariffs loom as a potential risk.

The Federal Reserve’s preferred inflation measure sped up in October, a development that is likely to keep central bankers wary as they contemplate the path ahead for interest rates.

The Personal Consumption Expenditures index climbed 2.3 percent from a year earlier, quicker than 2.1 percent in September, the Commerce Department reported Wednesday.

After stripping out volatile food and fuel costs to get a better sense of the underlying trend in prices, a “core” index climbed 2.8 percent from a year earlier. That was up from 2.7 percent previously.

And looking at how much prices climbed over just the past month, the overall index rose 0.2 percent from September, and the core index increased 0.3 percent. Both changes were in line with their previous readings and with economist expectations. Policymakers sometimes look at monthly price changes to get an up-to-date sense of how inflation is evolving.

The upshot from the report is that inflation is proving sticky after months of steady progress. Price increases remain much cooler than they were at their peak in 2022, which topped out at about 7 percent for the overall index. But they remain slightly faster than the 2 percent pace that the Fed targets.

“It emphasizes a reality about the inflation data, which is that inflation progress has stalled,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

That is preventing officials from declaring victory over inflation, although policymakers still expect price increases to continue to cool toward their goal.

And the lack of progress is leaving investors wondering whether the central bank will be able to cut interest rates again in December, as it had previously forecast, and how much it might cut rates next year.

Officials had previously expected to lower rates to 3.4 percent by the end of 2025, from about 4.6 percent now, but analysts and investors increasingly expect policymakers to revise their forecasts following their December meeting, predicting fewer rate cuts in the months to come.

“Maintaining rates at higher levels for longer will be a more restrictive policy — it will keep interest rates higher for households, for autos, for mortgages,” Mr. Luzzetti said.

So far, Fed officials have continued to predict that inflation will eventually come down, even if the process is likely to be bumpy.

But those forecasts now confront a major wild card: President-elect Donald J. Trump’s promise to sharply increase tariffs on U.S. trading partners.

Mr. Trump pledged both across-the-board tariffs and levies of 60 percent or more on China while he was campaigning. On Monday, he posted on Truth Social that on his first day in office he would impose a 25 percent tariff on all goods from Canada and Mexico and an extra 10 percent tariff on products from China.

While it is hard to say precisely how tariffs will feed into inflation — that depends on how trading partners react and how currencies adjust in response to the policies, among other things — economists widely think that they could push up prices.

For instance, economists at Deutsche Bank wrote in an analysis on Tuesday that tariffs on Canada and Mexico of the magnitude Mr. Trump suggested this week would most likely lift core P.C.E. inflation above 3 percent in 2025.

And other analysts have predicted that Mr. Trump’s tariff policies could be the roadblock preventing the Fed from returning inflation to 2 percent next year.

“While the pieces are in place for inflation to close most of the remaining gap in 2025, we expect an escalation in tariff policy to delay the return,” Ronnie Walker at Goldman Sachs wrote in a recent research note.

Goldman’s economists expect core inflation to return to 2.1 percent by the end of next year, excluding tariffs. But with higher tariffs on China and cars, it could end up closer to 2.4 percent, they estimated.

For officials at the Fed, the outlook for tariffs and other actions by the Trump administration remains too uncertain for policymakers to react immediately.

Jerome H. Powell, the Fed chair, said during a recent event in Dallas that “it’s too early to reach judgments” about how Mr. Trump’s potential policies would affect the economy.

Officials could begin to strike a warier stance on rate cuts for another reason. Economic growth has been stronger than expected in recent months, and Wednesday’s report reaffirmed that consumer spending has been holding up.

Consumption climbed by 0.4 percent in October, though by a more muted 0.1 percent after adjusting for inflation. Spending was stronger than previously reported in September, suggesting that American shoppers still have some vim. And household incomes increased more sharply than expected last month.

Add it all up, and the numbers suggest that the economy retains momentum. The question is whether that will give companies the ability to raise prices without scaring away consumers, threatening to keep inflation higher.

So far, Fed officials have expressed hope that the economic strength is coming from increased supply. Workers have been productive, and companies continue to hire, so it may be the case that there are simply more products and services to go around. That is a recipe for healthy growth that does not cause inflation.

But the combination of tariffs and a solid economy is likely to keep central bankers watchful headed into 2025.

“The Fed will be concerned and cautious,” Olu Sonola, head of U.S. economic research at Fitch Ratings, wrote after the report.