Underlying US inflation pressures moderated in August, with the annual rise in prices excluding food and energy falling below 4.0 per cent for the first time in more than two years, welcome news for the Federal Reserve as it ponders the monetary policy outlook.
But the battle against inflation is far from being won as the report from Commerce Department on Friday showed overall prices remaining elevated, partly because of higher gasoline prices. Still, slowing underlying inflation raised hopes that the US central bank will not raise interest rates in November.
“We continue to expect a slower pace of growth going forward and a further easing in price pressures, which should keep the FOMC (Federal Open Market Committee) on the sidelines for the rest of 2023,” said Rubeela Farooqi, chief US economist at High Frequency Economics in White Plains, New York.
The personal consumption expenditures (PCE) price index, excluding the volatile food and energy components, gained 0.1 per cent. That followed a 0.2 per cent advance in July. Economists polled by Reuters had forecast the core PCE price index would climb 0.2 per cent.
In the 12 months through August, the so-called core PCE price index increased 3.9 per cent. It was the first time since June 2021 that the annual core PCE price index was below 4.0 per cent.
The core PCE price index rose 4.3 per cent in July.
With the August data, the government introduced new price measures, the PCE price index excluding food, energy and housing, and PCE services excluding energy and housing, the so-called super core inflation.
The PCE price index excluding food, energy and housing also gained 0.1 per cent last month after rising 0.2 per cent in July. PCE services excluding energy and housing inflation rose 0.1 per cent after climbing 0.5 per cent in the prior month.
Gasoline prices accelerated in August, peaking at $3.984 per gallon in the third week of the month, the highest this year, according to data from the US Energy Information Administration. That compared to $3.676 per gallon during the same period in July.
Rising gasoline prices contributed to lifting the overall PCE price index 0.4 per cent in August after a rise of 0.2 per cent in July. In the 12 months through August, the PCE price index advanced 3.5 per cent after gaining 3.4 per cent in July. The US central bank tracks the PCE price indexes for its 2 per cent inflation target.
Policymakers are focused on the super core price measure as they try to gauge progress in their fight against inflation.
US stocks opened higher. The dollar fell against a basket of currencies. US Treasury prices rose.
Consumer spending
The Fed held interest rates steady last week but stiffened a hawkish monetary policy stance. Since March 2022, the central bank has raised its policy rate by 525 basis points to the current 5.25 per cent -5.50 per cent range. Financial markets currently expect the Fed will keep rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group’s FedWatch tool.
The surge in gasoline prices helped to support consumer spending last month, which gained 0.4 per cent. Data for July was revised higher to show consumer spending, which accounts for more than two-thirds of US economic activity, increasing 0.9 per cent instead of the previously reported 0.8 per cent.
When adjusted for inflation, spending edged up 0.1 per cent after shooting up 0.6 per cent in July. Economists expect consumer spending to have regained speed in the third quarter after slowing in the April-June period.
Estimates of gross domestic product growth for the third quarter are currently as high as a 4.9 per cent annualised rate. The economy grew at a 2.1 per cent pace in the second quarter.
