In August, inflation in the U.S. moved closer to the Federal Reserve’s target, potentially paving the way for future interest rate cuts, according to a report by the Commerce Department on Friday.
The personal consumption expenditures price index, a key measure used by the Fed to assess the cost of goods and services in the U.S. economy, increased by 0.1% for the month. This brought the 12-month inflation rate to 2.2%, a decrease from 2.5% in July and the lowest level since February 2021. The Fed aims for an annual inflation rate of 2%.
Economists surveyed by Dow Jones had anticipated a 0.1% increase in the all-items PCE for the month and a 2.3% rise from a year ago.
Excluding food and energy, the core PCE rose by 0.1% in August and was up by 2.7% from a year ago. This 12-month figure was 0.1 percentage point higher than in July. Fed officials typically prioritize core inflation as a more reliable indicator of long-term trends. The forecasts were 0.2% and 2.7% for core inflation, respectively.
Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented, “All quiet on the inflation front.” He added, “Inflation continues to keep its head down, and while economic growth may be slowing, there’s no indication it’s falling off a cliff.”
Despite the positive inflation data, personal spending and income figures fell short of expectations. Personal income increased by 0.2% for the month, while spending rose by 0.2%. The estimates had predicted increases of 0.4% and 0.3%, respectively.
Following the report, stock market futures showed a positive trend, while Treasury yields were negative.
These readings followed the Federal Reserve’s recent decision to lower its benchmark overnight borrowing rate by half a percentage point to a target range of 4.75%-5%.
In August, progress was made despite ongoing pressure from housing-related costs, which saw a 0.5% increase for the largest movement since January. Services prices increased by 0.2%, while goods experienced a 0.2% decline.
This marked the first time the central bank had reduced rates since March 2020, during the early stages of the Covid pandemic, and was an unusually significant action for the Fed, which typically prefers to adjust rates in quarter-point increments.
In recent days, Fed officials have shifted their focus from combating inflation to supporting a labor market that has displayed signs of softening. During their recent meeting, policymakers indicated a likelihood of further half-percentage-point cuts this year and a full percentage point reduction in 2025, although markets anticipate a more aggressive trajectory.
