In August, inflation in the U.S. moved closer to the Federal Reserve’s target, with the personal consumption expenditures price index rising by 0.1% for the month. This brought the 12-month inflation rate to 2.2%, down from 2.5% in July. Economists had been expecting a slight increase in all-items PCE to 2.3% from a year ago. Core PCE, excluding food and energy, also rose by 0.1% in August and was up 2.7% from a year ago, slightly higher than in July. The personal spending and income numbers, however, came in lower than expected, with personal income and spending increasing by 0.2% in August.
Despite the positive inflation data, the Fed recently cut its benchmark overnight borrowing rate by half a percentage point. This was the first time the central bank had eased rates since March 2020 in response to the Covid pandemic. Fed officials have shifted their focus from fighting inflation to supporting the labor market, which has shown signs of softening. At their recent meeting, policymakers indicated a likelihood of more interest rate cuts this year and in 2025.
Stock market futures were positive following the inflation report, and Treasury yields were negative. Housing-related costs increased by 0.5% in August, while services prices rose by 0.2% and goods declined by 0.2%. The Fed’s actions indicate a shift towards supporting economic growth and employment, rather than solely focusing on controlling inflation. Markets are expecting more aggressive rate cuts in the future.
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