In August, the Fed’s preferred inflation index climbed less than predicted.
The Federal Reserve’s preferred economic indicator as an inflation gauge climbed less than predicted in August, indicating that the central bank’s fight against rising prices is gaining headway.
The Commerce Department said Friday that the personal consumption expenditures price index excluding food and energy gained 0.1% for the month, less than the 0.2% advance predicted by the Dow Jones consensus of experts. The yearly rise in core PCE was 3.9%, which was in line with expectations.
Since November 2020, this was the weakest monthly rise.
Along with the minor increase in inflation, consumer expenditure increased 0.4% in current dollars. This was a significant decrease from 0.9% in July. Spending increased by 0.1% in real terms after increasing by 0.6% in July.
Including food and energy, headline PCE rose 0.4% month on month and 3.5% year on year. After peaking at 3.2% in June, headline inflation has been gradually rising in recent months.
Despite being one of several factors used by the Fed to estimate inflation, the PCE index is regarded as particularly helpful since it accounts for changes in consumer behavior, such as swapping lower-priced goods for more costly things. As a result, it delivers a more accurate cost-of-living picture than the more frequently used consumer price index, which measures expenses without taking into account replacement.
The core PCE was the first measurement to go below 4% year on year in over two years, and it was down from 4.3% in July.
“The Fed must be pleased with the overall direction of the PCE report,” said Quincy Krosby, chief global strategist at LPL Financial. “However, declaring victory on inflation would be premature.”
According to Friday’s data, energy costs drove the month’s inflation, which jumped to 6.1%. Food costs rose 0.2%. Energy was down 3.6% year on year, but food was up 3.1%.
The Fed considers 2% inflation to be a healthy growth rate for the economy. The last time core PCE was at that level was in February 2021.
The central bank has been quickly hiking interest rates since March 2022, but it chose to postpone the September meeting while it considers the impact of a dozen rises totaling 5.25 percentage points. Markets believe the Fed has finished hiking interest rates, however, policymakers at last week’s meeting signaled that one more quarter-point hike is probable before the end of the year.
Following the meeting, numerous Fed members stated that they expect interest rates to remain high for a lengthy period of time.
Following the news, however, market-based expectations for future rate rises fell.
According to the CME Group’s tracker of fed funds futures market prices, traders now assess a 15% likelihood for a November rise, down from 27.5% a week earlier. The odds of a December hike have dropped to around 31%, down from more than 42% a week ago.