Prices moved faster than paychecks in September. The personal consumption expenditures price index, the inflation gauge the Fed watches most, rose 0.5% for the month. Personal incomes rose 0.2%. That's one month. A retiree on a fixed check got no raise at all, so the gap is wider still.
The Commerce Department put out the numbers Thursday, Oct. 29. Over the past 12 months, PCE inflation is 3.6%, up from 3.4% a month earlier. Core PCE, which drops food and energy, rose 0.3% for the month and 3.1% for the year. The Fed's target is 2%. The Journal's Matt Grossman notes that PCE usually lands close to Wall Street's guess, because earlier reports feed into it. It still painted what he called an "uncomfortable inflation picture" for the Fed.
The paper's chart shows the arc. PCE inflation peaked near 7% in 2022, then fell for about two years. This year it turned back up. September's 3.6% is above August's 3.4%, and both sit well above the Fed's 2% target.
Why the Fed cares about this one
The Fed held its rate at 3.75% to 4% on Wednesday, Oct. 28, by a 10-2 vote. Both dissenters wanted a hike. The next meeting ends Dec. 9. A gauge at 3.6% against a 2% target is why investors now lean toward a hike. The same day brought a 3.4% growth number for the third quarter, so the economy hardly looks like it needs lower rates. The Polymarket box in the Journal on Thursday, Oct. 29, put the odds of no rate cut in 2026 at 96%. That's a crowd price, not a forecast, but it shows which way the crowd is facing.
For households, the plainer number is the monthly one. Prices rose 0.5% in September. Incomes rose 0.2%. If that pace held for a year, the gap would eat a few percent of your spending power, without a single bad decision on your part.
Our read
Our read, Cash Flow · M5. Inflation at 3.6%, with incomes up 0.2% in a month, squeezes anyone whose income doesn't reset. Social Security resets once a year with a cost-of-living adjustment, or COLA. Many pensions do too, often with a cap. A fixed annuity without an inflation rider doesn't. Our safe money stays in Treasury bills and floating-rate paper, SGOV in 49 books and USFR in 14, which reset with short rates. Long bonds tend to lose value when inflation runs hot, and we've kept new money out of them. A long-Treasury fund still sits in four older books. Nothing was added.
This week, find the inflation line in your own retirement income. On a pension statement it's the COLA. On an annuity contract it's the inflation rider or the increase option. Write down the cap. Say your check can rise at most 2% a year. Prices rose 3.6% over the past year, so your buying power slipped about a point and a half, and that gap compounds. Knowing the cap is step one. Step two is deciding which part of your savings does the catching up. We're glad to work that out with you in a review, before the next reading lands. You check the umbrella before the sky opens.