WASHINGTON, Sept 29 (Reuters) – Core U.S. inflation moderated in August, with annual prices excluding food and energy falling below 4.0% for the first time in more than two years, welcome news for the Federal Reserve, which is mulling monetary policy. Policy overview.
However, the battle against inflation is far from won, as a Commerce Department report on Friday showed overall prices were still elevated, partly due to higher gasoline prices.
While the economy remains strong, consumer spending is slowing, which combined with cooling underlying price pressures raised hopes that the U.S. Federal Reserve will not raise interest rates in November. The Consumer Spending and Inflation report is likely to be the official economic data release ahead of an expected partial shutdown of the US government starting after midnight on Saturday. A long data blackout spans its Oct. 31-Nov. 1 meeting.
“This report suggests an improvement in inflation,” said Conrad DiQuadros, senior economic adviser at Brain Capital in New York. “I think Fed officials are more focused on how long we keep rates at these high levels than how much higher they need to go.”
The personal consumption expenditures (PCE) price index, which excludes volatile food and energy components, rose 0.1% last month. This was the smallest rise since November 2020 and followed a 0.2% advance in July. Economists polled by Reuters had forecast the core PCE price index to rise 0.2%.
In the 12 months to August, the core PCE price index rose 3.9%. This is the first time since June 2021 that the annual core PCE price index has been below 4.0%. The core PCE price index rose 4.3% in July.
The reduction in core inflation was bolstered by two new price measures, the PCE price index excluding food, energy and housing, and the PCE services excluding energy and housing introduced by the government with the August report.
The PCE price index excluding food, energy and housing rose 0.1% last month after rising 0.2% in July. Excluding energy and housing inflation, PCE services rose 0.1%. So-called super-core inflation rose 0.5% in the previous month. As policymakers try to measure progress in their fight against inflation, they are watching the super core price level.
The inflation outlook was bolstered by a University of Michigan survey that showed consumers’ 12-month inflation expectations fell to 3.2% this month, down from 3.5% in August after March 2021. Consumers’ long-term inflation expectations fell to 2.8% from 3.0% last month.
But with oil prices rising, which drives gasoline prices at the pump, the path to the central bank’s 2% inflation target will be long.
The overall PCE price index rose 0.4% in August after rising 0.2% in July. In the 12 months to August, the PCE price index advanced 3.5% after gaining 3.4% in July. The central bank monitors PCE price indices for monetary policy.
Stocks traded mixed on Wall Street. The dollar fell against a basket of currencies. US Treasury prices rose, and yields retreated further from multi-year highs.
“Getting the annualized (core) number below 4% would be a big psychological win for the bulls and help keep the 10-year yield under wraps,” said David Russell, global head of market strategy at TradeStation. .
Consumers spend cool
The central bank kept interest rates steady last week, but tightened its hawkish monetary policy stance. From March 2022, it has raised its policy rate by 525 basis points to the current range of 5.25%-5.50%. Financial markets now expect the central bank to keep rates unchanged in its Oct. 31-Nov. 1 policy meeting, according to CME Group’s FedWatch tool.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.4% last month after rising 0.9% in July. This partly reflected higher sales at service stations as petrol prices rose. Costs were boosted by increased spending on housing and utilities and transportation, hospitals, and outpatient services.
When adjusted for inflation, spending rose 0.1% after rising 0.6% in July. Consumer spending is expected to regain momentum in the third quarter, with the economy growing in the April-June period.
Spending was supported by income, which rose 0.4% amid a 0.5% rise in wages, thanks to a tight labor market. Households also dipped into savings, with the savings rate falling to 3.9%, the lowest since last December, down from 4.1% in July. Rising gasoline prices, dwindling savings and student loan repayments can reduce spending.
A government shutdown would lay off hundreds of thousands of federal workers and cut access to food and nutrition assistance programs for millions of people.
“There’s no sign of a major rebound in consumer spending that would signal an impending recession in these numbers, but there are certainly growing signs of stress as consumers struggle under the weight of rising energy prices and borrowing costs and moderate income growth,” Scott said. Anderson is chief US economist at BMO Capital Markets in San Francisco.
Growth prospects for the quarter were boosted by other data from the Commerce Department on Friday, which showed the goods trade deficit narrowed 7.3% to $84.3 billion in August, as exports rose and imports fell. Retailers also increased inventory. Estimates of GDP growth for the third quarter were a 4.9% annualized rate. The economy grew at a 2.1% pace in the second quarter.
Report by Lucia Muticani; Editing by Paul Simao
Our Standards: Thomson Reuters Trust Principles.
