August’s Preferred Inflation Gauge Below Fed’s Expectations, 2023.
The Federal Reserve, in its battle against rising prices, received encouraging news as a key inflation indicator it closely monitors showed weaker-than-expected growth in August.
The Personal Consumption Expenditures (PCE) price index, excluding food and energy, increased by just 0.1% for the month, falling short of the anticipated 0.2% increase forecasted by economists surveyed by Dow Jones. The Commerce Department reported this development in its latest release.
On an annual basis, the core PCE, which excludes volatile food and energy prices, exhibited a 3.9% increase, aligning with the projected figures. This marks the smallest monthly increase since November 2020.
Alongside this modest inflation gain, consumer spending saw a 0.4% rise in current dollars for August, a significant drop from the 0.9% increase observed in July. When adjusted for inflation, spending grew by a mere 0.1%, a stark contrast to the 0.6% increase reported the previous month.
When considering all goods and services, including food and energy, the headline PCE index exhibited a 0.4% increase for August and a 3.5% surge compared to the previous year. Headline inflation had been steadily climbing in recent months, following a peak of 3.2% in June.
While the PCE index is just one of several indicators the Federal Reserve relies upon to gauge inflation, it holds particular significance due to its ability to account for shifts in consumer spending behavior, such as substituting lower-priced items for more expensive ones.
Consequently, it offers a more comprehensive depiction of the cost of living compared to the widely followed Consumer Price Index (CPI), which does not factor in substitution.
The core PCE figure for August marked the first sub-4% year-over-year reading in nearly two years, signaling a decline from the 4.3% figure recorded in July. Quincy Krosby, Chief Global Strategist at LPL Financial, commented on the report, stating, “The Fed must be pleased with the overall direction of the PCE report, but declaring victory on quelling inflation would be premature.”
The primary driver behind the month’s inflation was energy costs, which surged by 6.1%, according to the report. Food prices also registered an increase of 0.2%. On an annual basis, energy costs were down by 3.6%, while food prices were up by 3.1%.
The Federal Reserve maintains a target inflation rate of 2%, which indicates a healthy economic growth rate. The core PCE had last reached this level in February 2021.
Since March 2022, the central bank has been pursuing an aggressive campaign of raising interest rates. However, in the most recent September meeting, it opted to keep rates steady as it assesses the impact of the 5.25 percentage points’ worth of hikes implemented thus far.
Market expectations generally lean towards the belief that the Federal Reserve has concluded its rate-raising efforts, though officials at the meeting did indicate the likelihood of one more quarter-point increase before the year’s end.
Subsequent to the meeting, several Federal Reserve officials have expressed their expectation that interest rates will remain elevated for an extended period. Nevertheless, market-based predictions for future rate hikes have diminished in the wake of this report.
Traders are now assigning only a 15% probability for a rate increase in November, down from the 27.5% figure reported a week ago, as per the CME Group’s tracker of fed funds futures market pricing.
Odds for a rate increase in December have also fallen, now standing at about 31%, compared to more than 42% just a week prior. These developments suggest that the markets are becoming less convinced of the need for additional rate hikes in the near term.
