The Commerce Department reported Friday that inflation moved closer to the Federal Reserve's target in August, paving the way for future rate cuts.
The personal consumption expenditure price index, a measure the Fed focuses on to gauge the cost of goods and services in the U.S. economy, rose 0.1% for the month, bringing the 12-month inflation rate to 2. 5% in July fell to 2.2% and the lowest level since February 2021. The Fed is targeting annual inflation of 2%.
Economists surveyed by Dow Jones had expected headline PCE to rise 0.1% month over month and 2.3% year over year.
Excluding food and energy, core PCE rose 0.1% in August, 2.7% higher than a year ago, and the 12-month figure was 0.1 percentage points higher than in July. Fed officials tend to focus more on core bonds to better measure long-term trends. The respective forecasts were 0.2% and 2.7% on the core.
“All is quiet on the inflation front,” said Chris Larkin, managing director of trading and investing at Morgan Stanley’s E-Trade. “Add today’s PCE price index to the list of economic data landing in the sweet spot. Inflation remains under control and while economic growth may be slowing, there are no signs of it falling off a cliff.”
Although inflation numbers suggested continued progress, both personal spending and income numbers were weak.
Personal income rose 0.2% month-over-month, while spending rose 0.2%. The respective estimates assumed increases of 0.4% and 0.3%, respectively.
Stock market futures were positive following the report, while Treasury yields were negative.
The readings come just over a week after the Fed cut its federal funds rate by half a percentage point to a target range of 4.75% to 5%.
August's progress came despite continued pressure from housing-related costs, which rose 0.5% month-on-month, the biggest increase since January. Prices for services rose overall by 0.2%, while prices for goods fell by 0.2%.
It was the first time the central bank had eased interest rates since March 2020, in the early days of the Covid pandemic, and it was an unusually large move for a Fed that prefers to raise interest rates in quarter-point increments.
In recent days, Fed officials have shifted their focus from fighting inflation to supporting a labor market that has shown some signs of weakening. At their meeting last week, policymakers suggested cuts could be cut by another half a percentage point this year and a full percentage point in 2025, although markets expect a more aggressive stance.
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