Cleveland Fed tool projects October core PCE acceleration to 3.13%

The Federal Reserve Bank of Cleveland's Inflation Nowcasting tool projects that core Personal Consumption Expenditures (PCE) will rise to 3.13% in October, marking a reacceleration after three consecutive months of stability at 3%. This forecast suggests that inflationary pressures are spreading beyond the energy sector, complicating the Federal Reserve's mandate for price stability.

Headline Consumer Price Index (CPI) data also indicates upward pressure. The Cleveland Fed tool predicts headline CPI will accelerate to 3.77% in October, following a reacceleration to 3.7% in September. Rapidly increasing fuel costs driven by the ongoing closure of the Strait of Hormuz likely explain this rise. Specific September CPI components reflect this energy impact, with fuel oil up 74.0%, gasoline up 34.2%, and gas utilities up 5.0% year over year.

Core PCE, which excludes volatile food and energy costs, is a preferred gauge for long-term price trends by the Federal Reserve. The projected uptick to 3.05% in September and 3.13% in October implies that the U.S. economy is facing costs beyond a simple energy supply shock. Businesses are altering shipping routes and shifting suppliers due to the Iran war, adding to broader economic costs.

Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC) have maintained a hawkish stance in response to inflation that has exceeded the 2% target for 67 months. On September 16, Warsh and 11 other FOMC members voted unanimously to raise interest rates by a quarter point, setting the target range at 3.75%-4.00%. With both headline inflation and core PCE moving in the wrong direction, the likelihood of multiple rate hikes over the next year is increasing.

Long-run rate projections from FOMC members show a shift toward higher interest rates. Currently, 11 policymakers project a long-run rate above 3%, while only one projects it below 3%, with six at exactly 3%. Projections for 2029 indicate that more than half of the 17 members who submitted estimates believe rates will stay at or above 3.6% to bring inflation down to 2%. This contrasts with projections from two years ago, when more policymakers expected rates to settle below 3%.

Market data reflects these expectations. The CME Group's FedWatch Tool indicates a 72% probability that interest rates will rise by at least 75 basis points to reach a target range of 4.50%-4.75% by September 15, 2027. An aggressive rate-hiking cycle poses risks to the current market environment, which has been driven by artificial intelligence infrastructure spending that lifted the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite to record highs throughout 2026.