U.S. inflation eases in August as consumer spending jumps

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U.S. inflation eases in August

Highlights

The Personal Consumption Expenditures Price Index rises 0.3% in August after a downwardly revised 0.1% in July, with annual PCE inflation at 2.6%.
Consumer spending jumps 0.9% in August despite a near 12-1/2-year low in September consumer confidence, while July spending is revised to a 0.1% gain.
Financial markets now price about a 51.5% chance of a Fed rate hike in October, down from 70% before new inflation data and Fed comments.

August inflation data and revisions

As reported by Reuters, citing the Commerce Department's Bureau of Economic Analysis, the Personal Consumption Expenditures Price Index rises 0.3% in August after a downwardly revised 0.1% increase in July. Economists polled by Reuters expect a 0.4% gain, while annual PCE inflation advances 2.6% after a downwardly revised 3.4% in July.

The bureau also revises earlier inflation figures after changing its methodology for calculating prices for software and accessories, portfolio management fees and legal services. Those revisions go back to 2021 and lower previously reported year-on-year readings for July.

Excluding food and energy, the core PCE Price Index climbs 0.2% on the month after a downwardly revised 0.1% rise in July. Core PCE inflation stands at 3.0% from a year earlier in August, unchanged from the revised July pace.

Rate outlook and consumer demand

The Federal Reserve tracks the PCE measures against its 2% inflation target. The U.S. central bank this month raises its benchmark overnight interest rate to the 3.75% to 4.00% range, its first increase in three years, and signals that further borrowing cost increases remain possible in the months ahead.

Expectations for an October move weaken after New York Fed President John Williams says he sees no urgency for further action. Before the inflation release, financial markets price in about a 51.5% chance of another tightening step next month, down from 70% on Monday, according to CME's FedWatch Tool.

Despite concerns that higher prices and borrowing costs could curb demand, consumer spending surges 0.9% in August after a downwardly revised 0.1% gain in July. The increase comes even after the Conference Board reports that consumer confidence falls to a near 12-1/2-year low in September.

Our earlier coverage of U.S. stock and bond market moves highlighted how investors were bracing for the August Personal Consumption Expenditures (PCE) inflation report as a key trigger for the Federal Reserve’s next rate decision. We also outlined how swings in Treasury yields and inflation concerns were shaping sentiment and shifting the market’s perceived odds of another rate hike.

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