The latest reading of the Fed's preferred inflation gauge showed that prices increased largely in line with Wall Street's expectations in September.

The core Personal Consumption Expenditures (PCE) index, which strips out the cost of food and energy and is closely watched by the Federal Reserve, rose 0.3% from the prior month during September, in line with Wall Street's expectations for 0.3% but above the 0.1% reading seen in August.

Over the prior year, prices rose 2.7% in September, above Wall Street's expectations for 2.6% and in line with the 2.7% seen in August. On a yearly basis, overall PCE increased 2.1%, its slowest pace since February 2021.

Deutsche Bank chief US economist Matthew Luzzetti wrote in a note to clients that Thursday's release shows inflation "continues to show bumpy progress" toward the Fed's 2% goal.

The report comes just one week before the Federal Reserve will dole out its next policy decision. After cutting rates by half a percentage point in September, markets have priced in a roughly 96% chance the central bank will opt for a smaller 25 basis point interest rate cut on Nov. 7, per the CME FedWatch Tool.

Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards

Thursday's reading on inflation follows up September's Consumer Price Index (CPI), which showed prices rose at their lowest annual headline rate since February 2021.

"The big picture is that inflation continues to head lower, albeit with some bumps (like in September)," Sonu Varghese, Carson Group global macro strategist, wrote in a note. "This report is unlikely to change the expectation of the Fed cutting rates by 25 bps at their November meeting, but the December decision may be up in the air depending on upcoming payroll and inflation data."

Inflation's path lower has coincided with resilient economic growth data. Gross Domestic Product (GDP) showed the US economy grew at an annualized pace of 2.8% during the third quarter. Economists argued that data showed the economy is on solid footing as the Federal Reserve continues its interest rate easing cycle.

Another major check on the health of the economy looms Friday with the October jobs report. Consensus expects the US economy added 101,000 jobs in October, a move lower from the 254,000 jobs added in September.

Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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