The Federal Reserve's preferred measure of inflation, the core personal consumption expenditures (PCE) price index, rose at its slowest monthly pace since late 2020, according to a Bureau of Economic Analysis report released on Friday. The data supports the Federal Reserve's decision to forgo an interest rate hike at their next meeting.
The core PCE, which excludes volatile food and energy components, climbed 0.1% in August. Additionally, a key gauge of services costs closely monitored by the Fed also reported the smallest monthly increase since last year.
Inflation-adjusted consumer spending rose 0.1% in August, while nominal personal outlays increased by 0.4%. Maintaining low monthly core inflation readings is critical for instilling confidence among Fed officials that they are successfully managing inflation, providing room to abstain from further interest-rate hikes.
According to Andrew Hunter, deputy chief U.S economist at Capital Economics, the recent data "reinforce our view that the Fed's inflation projections are far too pessimistic." He continued to express doubt about the likelihood of a dramatic acceleration in monthly pace given the cooling labor market and downturn in housing inflation. This suggests that core PCE inflation may fall well below the Fed's 3.7% projection for year-end.
Following the release of the report, the S&P 500 opened higher, while Treasury yields and the dollar remained lower. The odds of a rate hike at the Fed's November meeting have also eased.
Earlier this month, after the Fed decided to keep rates unchanged, Chair Jerome Powell cited improving inflation reports. "We want to see that these good inflation readings that we've been seeing for the last three months, we want to see that it's more than just three months," Powell said at a post-meeting press conference.
In other economic indicators, services inflation excluding housing and energy rose 0.1%, according to the BEA. Meanwhile, the overall PCE price index jumped 0.4% due to a surge in energy costs.
Despite a resilient labor market supporting incomes, high prices and resuming student loan payments could threaten consumer spending, potentially steering the economy closer to a recession.
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