US inflation crept a step closer to the Federal Reserve’s target in August as the core personal consumption expenditure price index increased less than expected, opening up the door to possible interest rate cuts in the near future, the Commerce Department reported on Friday. Personal consumption expenditures, one of the main measures the Fed uses to determine the economy’s cost of goods and services, rose 0.1% in August. The year-over-year rate is now 2.2%, down from 2.5% in July, the lowest since February 2021. Its target is an annual inflation rate of 2%.
Economists had predicted a month-over-month increase of 0.1% in the all-items PCE index along with a year-over-year increase of 2.3%. The core PCE index, which excludes prices for food and energy, also rose 0.1% in August, but the 12-month increase was still at 2.7%. The amount was up 0.1 percentage point from last month. Fed officials commonly set their attention on core inflation since it aligns better with longer-term trends. It estimated core inflation to be at 0.2% for the month and year-over-year to be at 2.7%.
Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented, “All quiet on the inflation front. Today’s PCE Price Index joins a growing trove of economic indicators that demonstrate just how sweet of a spot the economy is in. Inflation is low, and the recent moderation of economic growth doesn’t seem to presage anything more serious than that.”
The positive news on the inflation front still was not enough to keep personal income and spending in tandem with expectations. Personal income rose by 0.2% during August, and spending was also up by 0.2%, both of which were less than the respective increase forecast of 0.4% and 0.3%. Following the report, the futures for the stock market stayed positive, while Treasury yields dipped.
These inflation readings come on the heels of an easier Fed that last month cut its benchmark overnight borrowing rate by half a percentage point, sending the target range up between 4.75% and 5%. That was the first cut since March 2020, an unusually big move for a central bank that also tends to make quarter-point adjustments more regularly.
Recent comments from Federal Reserve officials instead hint at a shift from fighting inflation to trying to support a slowing labor market. Policymakers tossed around the idea of another half-percentage point of cuts this year and a net one full percentage point by 2025, although markets now seem more inclined to anticipate something more drastic.
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