Consumer prices in the United States didn't climb as much as many had thought in August, according to a Commerce Department report released Wednesday. The personal consumption expenditures (PCE) price index, a major gauge of inflation, edged up by a seasonally adjusted 0.3% for the month. Over the past year, it has risen 3.4%. Economists surveyed by Dow Jones had expected those figures to be 0.3% and 3.7%, respectively, so this was a bit of a surprise.
Stripping out more unpredictable categories like food and energy, the core PCE went up 0.2% in August. That brings the yearly core inflation rate to 3%. These numbers, too, were below the forecasts of a 0.3% rise for the month and a 3.3% increase over the year. The Federal Reserve keeps an eye on the headline PCE number, but officials often see core inflation as a better long-term indicator.
The Bureau of Economic Analysis (BEA) has recently changed the way it calculates some parts of the index, including costs for legal services, software, computer accessories, and portfolio management. These changes cut the core PCE level for July by 0.36 percentage points.
After the report came out, stock market futures went up and Treasury yields went down. Traders adjusted their bets, now thinking there's less chance the Federal Reserve will hike rates in October. They see the next possible increase happening in December. David Russell, global head of market strategy at TradeStation, pointed out that this is good news for investors worried about rising bond yields, though he warned that the data doesn’t account for the recent jump in diesel prices.
On the personal finance front, the report showed personal income rose by 0.2%, and spending climbed by 0.9%. These numbers were compared to the consensus estimates of 0.4% and 0.8%, respectively. Even with the lower-than-expected inflation figures, both PCE levels are still way above the Federal Reserve's 2% target. This suggests there might be another interest rate hike later in the year.
Energy costs played a big role in the price increases seen in August. Gasoline prices shot up by 4.4%, and transportation services saw a 1.4% increase. Overall, energy goods and services jumped by 2.3%. Prices for goods and services went up by 0.3% each.
Heather Long, chief economist at Navy Federal, commented on the PCE inflation data, saying it showed no progress in bringing down inflation in August. She expects higher numbers for September and noted the financial strain on American consumers.
In other economic news, the Commerce Department reported a 2.2% annualized rise in gross domestic product (GDP) for the second quarter, based on the final of three estimates. This marks a notable revision from the previous estimate of 1.5%, driven by increased consumer and government spending, along with investment. Real final sales to private domestic purchasers, a closely watched metric by the Federal Reserve to gauge underlying demand, rose by 4.6%, an upward revision of 0.4 percentage points.
Inflation measures for the April-to-June period were also revised slightly downward, with headline PCE prices rising by 5% and core prices by 3.3%, both 0.3 percentage points lower than the earlier estimates.
The Federal Reserve is navigating a tricky situation with these mixed economic signs. Policymakers usually ignore price jumps caused by external factors like tariffs or supply disruptions, such as those stemming from tensions with Iran. But persistent price increases, combined with uncertainties like the rise of artificial intelligence, are challenging traditional economic models.
Market expectations for a Federal Reserve rate hike in October were strong after a quarter-percentage-point increase in September. However, comments from New York Fed President John Williams on Tuesday, along with Wednesday's data, have calmed those expectations. Williams mentioned there's no rush for immediate policy action, allowing time to gather more information. He also said another rate hike might still be on the table later this year, leading markets to look toward a potential increase in December.
