Inflation inched closer to the Federal Reserve’s target in August, easing the way for future interest rate cuts, the Commerce Department reported on Friday.
The personal consumption expenditures price index, a measure the Fed focuses on to measure the cost of goods and services in the US economy, rose 0.1% for the month, putting the 12-month inflation rate at 2.2%, down from 2.5% in July. and lowest since February 2021.
Economists polled by Dow Jones had expected all-item PCE to rise 0.1% in the month and 2.3% from a year ago.
Excluding food and energy, core PCE rose 0.1% in August and was up 2.7% from a year ago, a 12-month number 0.1 percentage point higher than July. Fed officials tend to focus more on the core as a better measure of long-term trends. The estimates are 0.2% and 2.7% in the core.
“Everything is quiet on the inflation front,” said Chris Larkin, managing director of trading and investment at E-Trade from Morgan Stanley. “Add today’s PCE Price Index to the list of economic data that has landed in the sweet spot. Inflation continues to decline, and while economic growth may be slowing, there are no indications of falling off the cliff.”
Although the inflation figures show continuous progress, the amount of personal expenditure and income are both visible.
Personal income rose 0.2% in the month while spending rose 0.2%. Estimates respectively for an increase of 0.4% and 0.3%.
Stock market futures were positive after the report while Treasury yields were negative.
The reading comes more than a week after the Fed lowered its overnight lending rate by half a percentage point to a target range of 4.75%-5%.
The advance in August came despite continued pressure from housing-related costs, which rose 0.5% on the month for the biggest move since January. Overall service prices rose 0.2% while goods fell 0.2%.
This is the first time the central bank has cut rates since March 2020 at the start of the Covid pandemic and is an extraordinary step for the Fed which prefers to move rates in quarterly increments.
In recent days, Fed officials have shifted their focus from fighting inflation to an emphasis on supporting a labor market that has shown some signs of softening. At last week’s meeting, policymakers indicated the possibility of another half percentage point in cuts this year and then a full point reduction for 2025, although markets expect a more aggressive path.
