August PCE inflation cools to 3.4%, easing pressure for an October Fed rate hike

Key points

• Headline PCE inflation rose 3.4% in August, missing the 3.7% consensus estimate.
• Core PCE inflation increased 3.0%, below the 3.3% forecast.
• The Bureau of Economic Analysis revised methodology for legal services, software, and portfolio management, lowering July core PCE by 0.36 percentage points.
• Second-quarter GDP was revised up to 2.2% from 1.5%, driven by consumer and government spending.
• Consumer spending rose 0.9% in August, exceeding the 0.8% consensus, while personal income grew 0.2%.
• Markets reduced the probability of an October rate hike, with expectations shifting to December.

Background

In July, PCE inflation held at 3.7%, above the Fed's 2% target, fueling expectations for a rate hike. In early September, CPI data showed inflation at 3.4%, with gasoline prices rising 3.9%. Fed officials, including Chair Warsh and Governor Barr, signaled that rates would rise if inflation did not cool. The September 16 meeting saw a rate hike, but the August PCE data now suggests the Fed may pause in October.

How outlets are covering it

CNBC emphasizes that the lower-than-expected PCE figures reduce the urgency for an October rate hike, citing New York Fed President John Williams' comments that there is 'no need for urgency.' However, CNBC notes that inflation remains well above the 2% target, and energy costs, particularly gasoline, drove the August increase. AP News highlights that most US stocks fell after the bond market increased pressure, suggesting that despite the cooling inflation, market volatility persists. Yahoo Finance's data, while primarily focused on stock movements, reflects the market's reaction to the PCE report, with stock futures gaining and Treasury yields falling. The outlets agree that the PCE data is a positive sign for investors but caution that inflation remains elevated.

Why it matters

The PCE report is the Federal Reserve's primary gauge for inflation, and its cooling trend suggests that the Fed may not need to raise rates in October. This could provide relief to consumers and businesses, as higher interest rates increase borrowing costs. However, the persistent gap between current inflation and the Fed's 2% target means that the risk of further rate hikes remains, particularly if inflation rebounds. The revised GDP growth and strong consumer spending indicate a resilient economy, but the Fed must balance growth with price stability.

What to watch

The Federal Reserve will likely monitor upcoming inflation data, including September PCE and CPI reports, before deciding on its next rate move. If inflation continues to cool, the Fed may hold rates steady in October and December. However, if inflation rebounds, particularly due to energy prices or other factors, the Fed may raise rates again. Investors will watch for signals from Fed officials, including Chair Warsh and Governor Barr, as they assess the need for further tightening.