In August, inflation in the United States moved closer to the Federal Reserve’s target, potentially paving the way for upcoming interest rate reductions, as stated by the Commerce Department on Friday.
The personal consumption expenditures price index, a key metric monitored by the Fed to assess the expenses of goods and services in the American economy, experienced a 0.1% increase during the month. This brought the 12-month inflation rate to 2.2%, a decline from July’s 2.5% and the lowest level recorded since February 2021.
Economists surveyed by Dow Jones had previously projected a 0.1% rise in all-items PCE for the month and a 2.3% increase from the previous year.
Excluding food and energy prices, core PCE also rose by 0.1% in August, marking a 2.7% uptick from a year ago. This 12-month figure was 0.1 percentage point higher than July’s. The Fed typically places more emphasis on core PCE as it provides a better indication of long-term trends. Projections had anticipated a 0.2% rise and a 2.7% increase on core.
Despite the positive inflation trends, personal spending and income figures fell below expectations. Personal income saw a 0.2% increase in the month while spending rose by 0.2%, missing estimates of 0.4% and 0.3% growth respectively.
These developments follow the Federal Reserve’s decision to lower its benchmark overnight borrowing rate by half a percentage point to a target range of 4.75%-5%, the first such adjustment since March 2020 during the initial stages of the Covid pandemic. This reduction was notably substantial for a central bank known to prefer adjusting rates in quarter-point increments.
In recent days, Fed officials have shifted their focus from combating inflation to prioritizing support for a labor market displaying signs of weakening. During their recent meeting, policymakers hinted at the possibility of further half percentage point cuts for the remainder of the year, followed by a full percentage point reduction in 2025. However, market expectations point towards a more aggressive rate adjustment trajectory.
