Underlying inflation on the Fed’s preferred measure rose at the slowest monthly pace in nearly three years, data released on Friday showed.
Core PCE prices increased just 0.1% in August from July, less than expected. (0.14483% unrounded.) The headline gauge rose 0.4%, likewise cooler than economists anticipated.
Note that the 12-month pace of underlying inflation is now below 4% in the US. 3.9% is nowhere near target, obviously, but this is the kind of progress that’ll help allay concerns among policymakers that their efforts so far are insufficient.
On a three-month annualized basis, core inflation was 2.2% in August.
“Higher-for-longer” worries proliferated this month amid the hawkish dot plot that accompanied the September FOMC meeting. Although not all officials are on board with another hike this year, those who are sound a semblance of serious. That is: Not everyone on the Committee is bluffing.
Arguably, the bigger concern for markets is the prospect of a Fed funds rate that’s only 25bps below current levels though 2024. That’s what the new SEP suggested. To many observers, that seems like wishful thinking to the extent it’s predicated on the Fed’s updated unemployment rate projections, which virtually screamed “no landing.”
On the consumption front, Friday’s release showed nominal spending rose 0.4% in August, less than the 0.5% consensus expected. Real spending, though, managed to post a small increase against expectations for no change.
The breakdown showed a 0.2% increase in real spending on services offset a decline in goods spending. Personal incomes rose 0.4%, in line with forecasts. The saving rate, at 3.9%, was the lowest since December.
The data came on the heels of a marked downward revision to the spending component of Q2 GDP. The consumption impulse, at 0.8% last quarter, was the second-weakest of the pandemic era.
Note that real disposable personal income fell a third month, according to Friday’s data.
That’s what drives consumer spending. And it’s falling with student loan repayments set to resume and pandemic savings buffers depleted for lower-income households.
The “supercore” services inflation measure that strips out energy and housing rose just 0.1% MoM, the smallest increase since July of 2022.
Friday’s update was “best characterized as in line with expectations and confirming the easing inflationary pressure,” BMO’s Ian Lyngen remarked. “It’s not a report that will change anyone’s forward forecast,” he added.
Notably, this was the last government release investors will see until the standoff in D.C. is resolved. Key data releases due next week, including the jobs report, will be suspended in a shutdown.
