The Federal Reserve’s preferred measure of underlying inflation rose at the slowest monthly pace since late 2020, helping to lay the groundwork for policymakers to forgo an interest-rate hike at their next meeting.
The core personal consumption expenditures price index, which strips out the volatile food and energy components, climbed 0.1% in August, according to the Bureau of Economic Analysis report out Friday. The overall PCE price index jumped 0.4%, reflecting a pickup in energy costs.
Inflation-adjusted consumer spending rose 0.1% last month. On a nominal basis, personal outlays increased 0.4% in August.
The report is likely the last major release from the government until lawmakers strike a deal to fund agencies. The government is expected to halt non-essential operations on Oct. 1, the start of the new fiscal year, due to a lapse in funding.
Sustaining low monthly core inflation readings is vital to building confidence among Fed officials that they are winning the inflation battle and creating room to refrain from additional interest-rate hikes.
US stock futures rose while Treasury yields and the dollar remained lower after the report. Odds of a rate hike at the Fed’s November meeting eased.
After the Fed kept rates unchanged earlier this month, Chair Jerome Powell specifically cited the improving inflation reports.
“We want to see that these good inflation readings that we’ve been seeing for the last three months, we want to see that it’s more than just three months,” he said at the post-meeting press conference.
After a burst of spending in the prior two months, the strength of American consumers dissipated in August. While a resilient labor market is helping to support incomes, the cumulative affect of high prices, a rise in gasoline costs and the resumption of student loan payments threaten to cool outlays.
Those developments could help to further limit inflationary pressures, but also run the risk of steering the economy closer to a recession.
A measure of services costs closely watched by Fed officials posted the smallest advance in more than a year. Services inflation excluding housing and energy rose 0.1%, according to the BEA.
While wages and salaries growth accelerated, real disposable income, the main support to consumer spending, declined 0.2% for a second month. Rising interest payments are also eating into Americans’ paychecks.
The saving rate slipped to 3.9%, the lowest this year, underscoring the summer pace of spending will likely not be sustainable into this fall.
A recent Fed study showed that after adjustment for inflation, the bottom 80% of houses by income have run out of extra savings and now have less cash on hand than when the pandemic began.
--With assistance from Kristy Scheuble and Augusta Saraiva.
This article was provided by Bloomberg News.