The personal consumption expenditure price index (PCE) in the US dropped to its lowest level since 2021 in September, reinforcing bets the US Federal Reserve Board (Fed) will cut interest rates again. The same report showed US consumer spending remained relatively robust in September, helping to support the overall economy. Data is showing a relatively solid US economy, which is raising expectations the Fed can gradually reduce interest rates, rather than taking an aggressive approach to loosening policy.

• The PCE rose by 2.1% year-over-year in September, down from the 2.3% annual rate in August and the lowest since February 2021. The Fed’s preferred inflation gauge is moving closer to its 2% target.
• On a monthly basis, the PCE increased by 0.2% in September. This was the fourth straight monthly increase. Food prices increased over the month, which was partially offset by a drop in energy prices.
• Demand remained relatively strong. Personal spending in the US rose by 0.5% in September, which exceeded the 0.4% increase expected by economists, based on a survey by Bloomberg. Spending increased for durable goods and services while dropping for energy products.
• To maintain strong spending, US consumers appear to be dipping into their savings. The savings rate dropped to 4.6% in September, which was the lowest rate since December 2023. However, US consumers got a bit of a boost from personal income, which increased by 0.3%.

The data suggests the US economy is on relatively steady footing, which could make the Fed cautious about cutting interest rates too quickly or too deep. The Fed could potentially cut interest rates at a slower pace than the Bank of Canada, putting downward pressure on the Canadian dollar. While that could make our exports more attractive to the US, it’ll make our imports from the US more expensive, which could push inflationary pressures higher.

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