On Friday, the U.S. Department of Commerce's Bureau of Economic Analysis released the Personal Consumption Expenditures (PCE) price index for August. This is the Federal Reserve's favored inflation measure, and the data continued to show a cooling trend, which is likely to boost the confidence of Fed officials to continue rate cuts.
Specifically, the overall PCE price index rose 2.2% year-over-year in August, lower than the expected 2.3% and down from the previous 2.5%. This marks a significant step towards the 2% inflation target and is the lowest level since February 2021. The month-over-month PCE increase was 0.1%, in line with market expectations.
The core PCE price index, which excludes the volatile food and energy sectors, increased by 2.7% year-over-year, matching market expectations, and was up 0.1% month-over-month, the lowest rise since May, missing the expected 0.2% increase.
Housing-related costs continued to exert pressure, rising 0.5% year-over-year in August, the biggest increase since January. Service prices overall rose 0.2%, while goods prices fell 0.2%.
Following the data release, market expectations for significant future rate cuts heightened. Interest rate futures traders now believe there is a slightly higher likelihood of a 50-basis-point cut in November compared to a 25-basis-point cut.
Last week, the Federal Reserve cut rates by 50 basis points, marking the start of a new easing cycle with a cut much larger than economic conditions warranted. Recently, Fed officials have shifted their focus from combating inflation to supporting the labor market, which has shown signs of weakness. Policymakers indicated last week that another 50-basis-point cut might occur this year, with an additional 100 basis points of cuts possible by 2025, though more aggressive moves are widely expected by the market.
Despite the progress on inflation, personal spending and income data were lower than expected, indicating a weakening economic condition. Personal income grew by only 0.2%, the lowest monthly increase since July 2023, and real personal consumption expenditure rose by 0.1%, the lowest since January 2024.
Additionally, the savings rate was higher than expected. Concerns have grown that consumers are drawing on savings to fund their spending. With the unemployment rate rising above 4%, anxiety in the labor market has sparked a precautionary savings panic, which could further dampen consumption.
Nick Timiraos, often considered a “Fed whisperer,” commented that the PCE data indicate a 2.2% rise over the 12 months ending in August, close to the Fed's 2% target. A year ago, the figure was 3.4%, and two years ago, it was 6.6%. The core PCE also rose 2.7% year-over-year in August, compared to 3.8% last year and 5.4% two years ago.
Peter Cardillo, Chief Market Economist at Spartan Capital Securities, noted that today's PCE data confirm two things: inflation continues to decline, with the overall rate of 2.2% nearing the Fed's 2% target. He added that personal income and spending figures falling short of expectations indicate a slowing economy, which paradoxically is good news for the market as it suggests the Fed is likely to continue rate cuts, possibly another 50-basis-point cut before year-end.
