The US Bureau of Economic Analysis (BEA) reported on Friday that the personal consumption expenditures (PCE) price index rose 2.8% year-on-year in September. This reading followed the increase recorded in August by 2.7%, and was in line with market expectations. On a monthly basis, the PCE price index rose 0.3%, matching analyst estimates and the August reading.
The core personal consumption expenditures price index, the Federal Reserve’s (Fed) preferred measure of inflation, rose 2.8% year over year, down from 2.9% in August.
Market reaction
The US Dollar Index showed no immediate reaction to these numbers and was last seen posting small daily losses near 99.00.
Frequently asked questions about inflation
Inflation measures the rise in the prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the number that economists focus on and is the level targeted by central banks, which are tasked with keeping inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a monthly (MoM) and yearly (YoY) basis. The core CPI is the number targeted by central banks because it excludes volatile food and fuel inputs. When the core CPI rises above 2%, it typically causes interest rates to rise and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation falls.
Although it may seem counterintuitive, high inflation in a country causes the value of its currency to rise and vice versa for lower inflation. This is because the central bank will typically raise interest rates to combat rising inflation, which attracts more global capital flows from investors looking for a profitable place to park their money.
Previously, gold was the asset investors turned to during times of high inflation because it maintained its value, and while investors will often continue to buy gold for its safe holdings in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will raise interest rates to combat it. High interest rates are negative for gold because they increase the opportunity cost of holding gold versus interest-bearing assets or putting money in a cash deposit account. On the flip side, lower inflation tends to be positive for gold because it lowers interest rates, making the shiny metal a more viable investment alternative.
