The Federal Reserve may have nearly achieved its 2% inflation target.

• The latest inflation data supports the notion that the Federal Reserve is close to achieving its 2% target, a view held by Goldman Sachs, who believes the central bank may have already reached this milestone.
• Lower inflation allows the Fed to continue reducing interest rates from a policy perspective.

The Federal Reserve is getting closer to its objective, as this week's inflation data supports this notion, following the central bank's significant interest rate reduction a few weeks ago.

The consumer and producer price indexes for September were in line with expectations this week, indicating that inflation is moving towards the central bank's 2% target.

Goldman Sachs economists believe the Fed may have already reached its destination.

The Commerce Department's personal consumption expenditures price index for September is projected to show a 12-month inflation rate of 2.04% by the Wall Street investment bank on Friday.

If Goldman is correct, the PCE inflation rate would be rounded down to 2%, which aligns with the Fed's long-held objective, two years after inflation reached a 40-year high and triggered aggressive interest rate hikes. Despite preferring the PCE as its inflation gauge, the Fed considers a range of inputs when making decisions.

"Chicago Fed President Austan Goolsbee stated in a CNBC interview that the trend over the past 12-18 months has shown a significant decrease in inflation and a cooling of the job market, which is approximately at the level of full employment. He expressed a desire to keep both inflation and the job market at their current levels."

Some obstacles ahead

Though it is challenging to control inflation, recent data suggests that although prices have not decreased, the rate at which they are rising is slowing down.

In September, the 12-month rate for the all-items consumer price index was 2.4%, while the producer price index, which serves as a proxy for wholesale inflation and a leading indicator of pipeline pressures, stood at an annual rate of 1.8%.

The Cleveland Fed's tracking aligns with Goldman's prediction that the PCE index will reach 2%.

The central bank district's "inflation nowcasting" dashboard predicts that the 12-month headline PCE rate for September will be 2.06%, which will be rounded up to 2.1%. However, the annualized inflation rate for the entire third quarter is only 1.4%, which is significantly below the Fed's target of 2%.

Policymakers must address some caveats to ensure their work is effective.

The PCE's core inflation rate is projected to be 2.6% annually in September, according to Goldman. However, using the consumer price index, core inflation was even more severe in September, at 3.3%.

Officials believe that the high shelter inflation numbers are the main cause of the core measure, which they expect to decrease as the lower trend in rents is reflected in the data.

Last week, Fed Chair Jerome Powell stated that he anticipates housing inflation to decrease while "broader economic conditions also contribute to further disinflation."

Lower inflation may allow the Fed to continue reducing interest rates, but there is concern about how quickly it should proceed when considering the labor market.

The Fed's unprecedented half percentage point reduction in September, resulting in a fed funds range of 4.75% to 5.00%, was a significant move for an expanding economy. The Fed is predicted to resume its normal quarter-point pace. Atlanta Fed President Raphael Bostic stated on Thursday that he would consider not making a move at the November meeting.

"Kurt Rankin, a senior economist at PNC, stated in a post-PPI analysis that aggressive easing could lead to an increase in consumer demand, which would put pressure on businesses to meet that demand. This, in turn, would cause businesses' own costs to rise as they compete for the necessary resources to meet the increased demand."

At the November and December meetings, the Fed is predicted to cut rates by a quarter point, according to futures traders' bets.