The Federal Reserve's favored measure of underlying inflation showed only a slight increase in August, indicating a cooling economy and paving the way for potential future rate cuts. Data released by the U.S. Bureau of Economic Analysis on Friday revealed that the core PCE price index, excluding volatile food and energy items, rose by just 0.1% from July, marking the smallest gain in three months and falling short of the 0.2% market expectation. Year-over-year, core PCE increased by 2.7%, meeting market predictions and slightly higher than July's 2.6%.
Overall PCE rose 0.1% from July and 2.2% year-over-year, the lowest level since February 2021, slightly below the market’s expectations of 0.1% and 2.3%, respectively. Inflation-adjusted spending also grew by just 0.1%. Nominal personal income climbed 0.2%, while the savings rate decreased to 4.8%.
Following this data release, U.S. Treasury yields and the dollar dropped as markets anticipated that these figures would prompt the Fed to continue cutting rates in the upcoming months, intensifying the ongoing debate about the extent of these cuts. After the Fed opted for a significant 50 basis point rate cut earlier this month to start its easing cycle, futures show a divided investor sentiment on whether a similar move or a smaller cut will occur in November. Rate future traders see a slightly higher probability of a 50 basis point cut compared to a 25 basis point cut next month.
Currently, Fed officials have shifted their focus from combating inflation to supporting the job market, which has shown some signs of weakness. During last week’s meeting, policymakers indicated a possible additional 50 basis point cut this year, followed by a 100 basis point cut by 2025. However, the market expects more aggressive measures.
Before this report, the U.S. Bureau of Economic Analysis released its annual revisions to GDP data on Thursday. The data showed faster economic growth and higher savings than previously reported for 2022 and 2023, thanks to increased income.
Details of the August inflation data highlighted a broad economic cooldown. Service prices, excluding housing and energy, rose by 0.2% for the second consecutive month. Goods prices, excluding food and energy, fell by 0.2%, marking the largest decline in three months.
The increase in spending was driven by higher service expenditures. Overall service spending grew by 0.2% after a 0.1% rise, while goods spending remained flat following steady growth the previous month. Despite the largest wage increase since May, disposable income growth slowed due to declines in owner income, interest income, and dividend income.
