By Greg Heym, Brown Harris Stevens Chief Economist and host of Crossing The Line
Today, we're paid a visit by the PCE price index, also known as the Fed's favorite inflation gauge. Let's see what he's brought us.
Annual Inflation Lower than Expected in August
The personal consumption expenditures price index—AKA PCE—rose just 0.1% last month, and was 2.2% higher than a year ago. The annual rate of inflation was below the Dow Jones forecast of 2.3%, and the lowest reading since February 2021.
So far so good, but what about core inflation?
Core PCE also rose 0.1% in August and was up 2.7% from a year ago. Why is the annual rate of core inflation higher than the headline number of 2.2%? The same reason as the CPI data; energy prices. Remember that core inflation strips out food and energy prices, as they can be very volatile. Energy prices fell 5% last month, so it’s not surprising core inflation is running higher over the past year. One other fact worth noting about core inflation is that over the past three months, it has risen at a 2.1% annual pace, which is just 0.1% above the Fed’s target.
The takeaway here is that inflation continues to edge closer to the Fed’s 2% target, and today’s report increases the already high probability of two more 25 basis point cuts this year.
So, this is a great report on inflation, but the BEA release also has spending and income data. Here are the highlights of that data:
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Consumer spending rose 0.2% in August, lower than the 0.3% forecast.
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Personal income also rose 0.2% last month, below its forecast of 0.4%. It is also the lowest monthly increase in personal income since January 2022.
So, incomes and spending are rising less than expected. That by itself is not good news, but it will give the Fed more confidence to continue cutting rates in the coming months.
