Consumer Prices Rise Less Than Expected in August,Core Inflation at 3%
- Consumer prices increased by 0.3% in August, with a year-over-year gain of 3.4%.
- Core inflation, excluding food and energy, rose by 0.2%, bringing the annual rate to 3%.
- The Fed may consider another interest rate hike in December given persistent inflation.
The Federal Reserve’s primary inflation measure reported a smaller-than-expected rise in consumer prices for August, as highlighted by the Commerce Department on Wednesday. The personal consumption expenditures price index (PCE) saw a seasonally adjusted increase of 0.3% for the month, resulting in a 12-month gain of 3.4%. Economists surveyed by Dow Jones anticipated increases of 0.3% and an annual increase of 3.7%, respectively.
When excluding volatile food and energy prices, the PCE recorded a 0.2% climb, which set the annual core inflation at 3%. Forecasts had suggested increases of 0.3% and 3.3% for the core measure.
Although the Fed officially monitors the headline PCE figure, core inflation is often regarded as a more reliable indicator of enduring trends. The Bureau of Economic Analysis (BEA) recently revised its methodology, impacting several components of the index, such as prices for legal services, software, and computer accessories. These changes reduced the core PCE level for July by 0.36 percentage points.
Following the inflation report, stock market futures showed gains, while Treasury yields fell. Traders decreased the likelihood of a Federal Reserve rate hike in October, shifting expectations for the next increase to December. David Russell, global head of market strategy at TradeStation, noted, “This is good news for investors worried about the recent surge in bond yields, and it bolsters the case for not hiking in October.” However, he pointed out the data may not fully capture recent spikes in diesel prices.
The report also indicated that personal income rose by 0.2%, while consumer spending increased by 0.9%, diverging from the consensus estimates of 0.4% and 0.8%, respectively.
Inflation Remains Elevated; GDP Figures Revised Upward
Both PCE levels persist significantly higher than the Federal Reserve’s 2% target, suggesting that the central bank may follow up on its September interest rate hike with another increase during its upcoming meetings in October or December. Sonu Varghese, global macro strategist at Carson Group, remarked, “Even after major methodological revisions, PCE inflation is still running hot however you cut it.” He highlighted that the economy is strong, policy remains accommodative, and the Fed faces challenges in determining appropriate measures of restraint.
The increase in prices during August was primarily driven by energy costs, alongside gains in various other sectors. Gasoline prices surged by 4.4%, while transportation services rose by 1.4%. Overall, both goods and services experienced price increases of 0.3%.
Heather Long, chief economist at Navy Federal Credit Union, commented, “The PCE Inflation data – the Federal Reserve’s favorite – show no progress in August on inflation. And it’s inevitable that September will be higher. Meanwhile, American consumers are feeling the squeeze.”
In related economic news, the Commerce Department revealed that the gross domestic product (GDP) increased at a 2.2% annualized rate in the second quarter, marking a significant revision from a prior estimate of 1.5%. This adjustment reflects enhanced contributions from consumer and government spending as well as investment. Real final sales to private domestic purchasers, closely monitored by Fed officials, rose by 4.6%, a revision upward by 0.4 percentage points.
Inflation measurements for the April-through-June period also showed slight reductions, with headline PCE prices increasing by 5% and core inflation rising by 3.3%, both figures 0.3 percentage points lower than previous estimates.
As various economic signals present a complex picture, Fed policymakers might typically ignore price spikes due to external shocks; however, sustained price increases and uncertainties surrounding artificial intelligence developments present challenges to standard economic approaches.
The markets had previously expected a strong likelihood of a quarter percentage point rate hike in October, but influential comments from New York Fed President John Williams, combined with the new data, have tempered those expectations. Williams remarked, “With the policy action we took at our September meeting, there is no need for urgency, and we have time to gather more information.” He added that another hike “may be appropriate late this year,” leading markets to anticipate the next increase in December.
News Courtesy of CNBC
