Soft landing? Not so fast: Inflation heated back up in October

(CNN) — The Federal Reserve’s favored inflation gauge just moved in the wrong direction. It comes as President-elect Donald Trump promises massive tariffs that could push the cost of living even higher.

The Personal Consumption Expenditures price index rose 2.3% in October from the year before, accelerating from the 2.1% pace notched in September, according to Commerce Department data released Wednesday.

On a monthly basis, prices rose 0.2%, matching the gain seen in September.

Inflation within the services sector drove much of the monthly increase, as those prices rose 0.4% from September, while goods prices ticked up by 0.1%. Food and gas prices, two of the biggest touchpoints for consumers, held relatively stable.

Wednesday’s inflation readings were exactly what economists had anticipated: Consensus estimates called for a 0.2% monthly increase and for the annual rate to climb to 2.3%, according to FactSet.

“The big picture is inflation is still a risk; that hasn’t changed,” Elizabeth Renter, senior economist at NerdWallet, told CNN in an interview. “But this report is not cause for alarm.”

Economists were anticipating that inflation would run hotter in October, in part because of stubborn housing-related costs and some price hikes considered one-time in nature (notably air fares and portfolio management fees), as well as unfavorable comparisons to a year-ago period when inflation cooled rapidly.

A bumpy landing, indeed

The process of reining in high inflation was expected to be bumpy, and the latest reading may be just that. However, some persistent price pressures (for significant expenses like rents and mortgages) are keeping inflation from stabilizing at the central bank’s target 2% rate.

“The disinflationary trend that we saw earlier this year has effectively stalled as we head into what’s likely going to be a bumpy 2025 inflation ride,” Olu Sonola, head of US economic research for Fitch Ratings, said in a statement. “The Fed will be concerned and cautious. However, the totality of the data continues to point in the direction of a rate cut in December, while guiding towards a very slow pace in 2025.”

When excluding food and gas prices, two categories that tend to be very volatile, the core PCE index rose 0.3% on a monthly basis and accelerated to 2.8% for the 12 months ended in October. The core index — which posted monthly and annual readings of 0.3% and 2.7% in September — is closely watched as a gauge of underlying inflation.

“Core has basically gone nowhere for six months,” Dan North, senior economist for Allianz Trade North America, told CNN. “And 2.8% is a long way from 2%. And 2% doesn’t mean just bumping 2%, it means getting to 2% or less indefinitely.”

When Fed policymakers meet next month, they’re widely expected to cut rates by a quarter-point. While that would mark the third consecutive cut for the Fed, future loosening actions may be fewer and far between — in part because of some underlying stubborn price pressures but also potentially because of fiscal and federal policy, North said.

Proposed tariffs an ‘upside risk’ to inflation

However, there’s ample concern inflation’s current trend and trajectory could drastically change in the coming months.

On Monday, Trump posted on his Truth Social platform that he planned to implement a 25% tariff on all products from Mexico and Canada in retaliation for illegal immigration and “crime and drugs” coming across the border. He also indicated plans to tack on additional tariffs on China — by another 10% — until it prevents the flow of illegal drugs into the United States.

Such a move would drive prices higher for consumers and likely lift the PCE price index by 0.5% to as much as 1.1%, economists noted Tuesday.

“The proposed tariffs to Canada and Mexico are an upside risk to our inflation forecasts,” Deutsche Bank Research economists wrote Monday in a note.

The scope and extent of that risk, however, is uncertain at this stage, NerdWallet’s Renter said.

“We’ll just have to wait and see,” she said. “I think we need to be cautious about interpreting campaign or social media promises as policy sure-things. But we know that tariffs are inflationary; history has shown us that.”

More fuel for the economic engine

The PCE price index is part of the Commerce Department’s monthly Personal Income and Outlays report, which includes comprehensive data on how Americans earn, spend and save.

And in October, that financial foundation was indeed strong for the economy-powering consumer: Personal income shot up 0.6%, the largest monthly increase since March; and disposable income (income minus taxes) was up 0.7% in nominal terms and 0.4% when taking inflation into account.

Spending, which economists expected would take a hit because of back-to-back devastating hurricanes to hit the Southeast, held up as well, rising 0.4% for the month (and 0.1% when accounting for inflation).

“This is a good setup for holiday sales,” North said, adding he expects holiday spending to outpace the National Retail Federation’s forecasts for a 2.5% to 3.5% bump in sales for the season.

Consumer spending, which accounts for more than two-thirds of output, has helped drive solid economic growth. Earlier on Thursday, the Commerce Department reported that US gross domestic product grew at an annual rate of 2.8% during the third quarter, unchanged from its initial estimate.

Still, while the data shows robust spending and healthy consumer finances on a macro level, that’s not necessarily be the case for all Americans, Renter noted.

“It’s important to keep in mind that, on average, the economic picture is good, and consumers are spending heartily, but there’s a lot of color and nuance hiding beneath those aggregates,” she said.

This story has been updated with additional developments and context.

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CNN’s David Goldman contributed to this report.