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Inflation hits lowest level since 2021, Fed's preferred gauge shows

Inflation continued to cool in October, according to the Federal Reserve's favorite price index.

The Personal Consumption Expenditures (PCE) Index grew 3% year over year for the month, down from 3.4% in September and in line with expectations. "Core" PCE, which excludes the volatile food and energy categories, grew 3.5%, down from 3.7% from the month prior and also in line with what economists surveyed by Bloomberg had expected.

Month over month, core PCE rose 0.2% in October, down from 0.3% in September.

Core PCE is the inflation measure most often mentioned by Federal Reserve Chair Jerome Powell and therefore is watched closely by investors.

"For the Fed, fresh signs of softer inflation and consumer demand confirm it is well positioned to remain on hold at the December policy meeting," EY senior economist Lydia Boussour wrote in a research note on Thursday. "We reiterate our long-standing view that the Fed’s tightening cycle is likely complete. With the Fed’s favored inflation gauge — core PCE inflation — likely falling below 2.5% in the spring, we expected the first Fed rate cut in June 2024."

Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards

Ahead of the print's release, markets had upped bets that the Fed was likely done hiking interest rates as economic data recently showed inflation declining while the economy continued to grow.

The moves coincided with recent commentary from Fed officials that investors deciphered to mean the central bank could cut interest rates sooner than many had initially thought.

"I’m sensing greater clarity about a few important currents. One is the direction of inflation. There’s no question the rate of inflation has slowed materially over the past year-plus," Atlanta Fed president Raphael Bostic wrote in an essay published Wednesday.

As of Thursday morning, markets were pricing in a 74% chance of an interest rate cut by the end of the Fed's May meeting. A month ago, markets had priced just a 38% chance of a cut in the same time period, per the CME FedWatch Tool.

Markets priced in a 92% chance of a rate cut by June, up from a 60% chance a month ago.

Thursday's PCE release falls in line with what investors already digested earlier this month from another popular inflation gauge, the Consumer Price Index (CPI). On Nov. 14, the CPI print showed headline inflation declining at its lowest pace since September 2021.

U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023. REUTERS/Evelyn Hockstein
U.S. Federal Reserve Chairman Jerome Powell takes questions from reporters during a press conference after the release of the Fed policy decision to leave interest rates unchanged, at the Federal Reserve in Washington, U.S, September 20, 2023. REUTERS/Evelyn Hockstein (Evelyn Hockstein / reuters)

Josh Schafer is a reporter for Yahoo Finance.

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