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Fed's Favored Inflation Indicator Reports Smaller-than-Expected Rise in August

In August, a favored economic indicator of inflation by the Federal Reserve, the personal consumption expenditures (PCE) price index, excluding food and energy, experienced a smaller-than-anticipated rise, suggesting progress in the central bank's battle against escalating prices.

The Commerce Department revealed that it had a 0.1% increase for the month, contrary to the 0.2% gain predicted by the Dow Jones consensus of economists. This reflected the smallest monthly rise since November 2020, with the annual increase for core PCE standing at 3.9%, aligning with projections.

Consumer spending also witnessed a modest inflation gain of 0.4% based on the current-dollar, a notable decrease from July’s 0.9%. Adjusted for inflation, the real-term spending only rose by 0.1% after a 0.6% increase in July.

When food and energy are included, the headline PCE showed a 0.4% rise for the month and 3.5% from the previous year. This headline inflation has subtly increased following the 3.2% mark in June.

The PCE index is valuable to the Federal Reserve as it adjusts for changes in consumer behavior, like opting for less costly goods, thus offering a more accurate reflection of living costs compared to the consumer price index, which does not account for substitution. This core PCE index marked the first reading below 4% year-over-year in almost two years, down from 4.3% in July.

Quincy Krosby, Chief Global Strategist at LPL Financial, noted, “The Fed must be content with the PCE report’s overall trend, but it’s too soon to claim success in controlling inflation.”

The inflation for the month was primarily propelled by a 6.1% surge in energy costs, with food prices seeing a 0.2% increase. Annually, energy decreased by 3.6% while food rose by 3.1%.

Targeting a 2% inflation rate, indicative of healthy economic growth, the Federal Reserve has increased interest rates robustly since March 2022, albeit with a pause in September to assess the cumulative impact of twelve hikes amounting to 5.25 percentage points. The prevalent expectation is that the Fed might abstain from further rate increases, however, speculation of one more quarter-point hike before year’s end does exist.

Post-meeting, several officials from the Federal Reserve have expressed anticipations of sustained high-interest rates.

Nevertheless, the prospects for forthcoming rate augmentations have dimmed post-report, with traders now attributing only a 15% likelihood for a rise in November, a drop from the preceding 27.5%, and the probabilities for a December surge have dipped to approximately 31% from over 42% a week earlier, as per the CME Group’s tracker of federal funds future market pricing.


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