The annual increase in prices outside of food and energy decreased below 4.0% for the first time in more than two years in August, which is good news for the Federal Reserve as it considers the future of monetary policy.

However, the fight against inflation is far from complete as the Commerce Department’s report on Friday indicated that overall prices were remained high, in part because of increasing petrol prices.

Although consumer spending is slowing, the economy is still doing well. This, together with easing underlying price pressures, has given rise to predictions that the U.S. central bank won’t raise interest rates in November.

Before an anticipated partial shutdown of the U.S. government that is set to start after midnight on Saturday, the consumer expenditure and inflation report is likely the last official economic data release. A protracted data blackout may also discourage the Fed from raising interest rates at its meeting on October 31–November 1.

“This report suggests that there’s progress on inflation,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. “I think Fed officials are at the point where they’re shifting the focus to how long do we keep rates at these high levels, rather than how much higher the rates have to go.”

Excluding the volatile food and energy components, the personal consumption expenditures (PCE) price index grew by 0.1% last month. That increase, which came after a 0.2% increase in July, was the weakest since November 2020. Reuters polled economists, who predicted that the core PCE price index would increase by 0.2%.

The so-called core PCE price index rose 3.9% in the 12 months leading up to August. The annual core PCE price index fell below 4.0% for the first time since June 2021. In July, the core PCE price index increased by 4.3%.

Two new price measures, the PCE price index excluding food, energy, and housing, and the PCE services excluding energy and housing, which were introduced by the government in the August report, further contributed to the slowing underlying inflation.

In addition, the PCE price index that excludes food, energy, and housing increased by 0.1% in August after increasing by 0.2% in July. PCE services inflation increased by 0.1% excluding energy and housing. The’super core’ inflation rate increased by 0.5% in the previous month. The super core pricing metric is being monitored by policymakers as they try to determine how well their efforts to combat inflation are working.

The University of Michigan survey that revealed consumers’ 12-month inflation forecasts dropped from 3.5% in August to 3.2% this month—the lowest level since March 2021—also helped to improve the outlook for inflation. Long-term inflation predictions among consumers decreased from 3.0% to 2.8% last month.

However, rising oil prices, which are increasing the price of petrol at the pump, signal it will take some time to reach the Fed’s 2% inflation objective.

After rising by 0.2% in July, the PCE price index as a whole grew by 0.4% in August. The PCE price index increased 3.5% over the course of the previous 12 months, up from 3.4% in July. For monetary policy, the central bank monitors the PCE price indices.

Wall Street stock trading was uneven. In relation to a currency basket, the dollar decreased. Prices for US Treasury bonds increased while rates decreased from multi-year highs.

“Getting (the) year-over-year (core) number below 4% could be a big psychological victory for the bulls and help keep a lid on the 10-year yield,” said David Russell, global head of market strategy at TradeStation.

Last week, the Fed kept interest rates unchanged while adopting a more hawkish posture on monetary policy. It has increased its policy rate by 525 basis points since March 2022 to the present level of 5.25%-5.50%. According to the FedWatch tool from CME Group, financial markets presently anticipate that the central bank will maintain rates unchanged at its policy meeting on October 31–November 1.

Consumer spending, which makes up over two-thirds of the American economy, up 0.4% this month after rising by 0.9% in July. That was partially the result of increased sales at service stations brought on by rising petrol prices. Increased expenditures on housing, utilities, transportation, hospitals, and outpatient treatments all helped to boost spending.

Spending increased by 0.1% after rising by 0.6% in July after being adjusted for inflation. After weakening in the months of April and June, consumer spending is anticipated to have picked up steam in the third quarter, keeping the economy expanding.

Due to a tight labour market, incomes increased by 0.4% while wages increased by 0.5%, supporting increased spending. Households also reduced their savings, with the rate falling from 4.1% in July to 3.9%, the lowest level since last December. Spending may be restricted by rising petrol prices, shrinking savings and the start of student loan installments.

The government shutdown, which would result in the layoff of hundreds of thousands of federal employees and restrict access to food and nutrition assistance programmes for millions of people, is thought to have a negative impact on consumer spending.

“There is no sign of a major pullback in consumer spending that would signal an impending recession in these numbers, but definitely growing signs of stress as consumers increasingly struggle under the weight of rising energy prices and borrowing costs and moderating income growth,” said Scott Anderson, chief U.S. economist at BMO Capital Markets in San Francisco.

The Commerce Department released additional statistics on Friday that showed the goods trade deficit shrank 7.3% to $84.3 billion in August, with exports increasing and imports dropping, boosting growth forecasts for this quarter. Inventory builds were also made by retailers. Gross domestic product growth for the third quarter is predicted to increase by as much as 4.9% annually. In the second quarter, the economy expanded at a 2.1% annual rate.

(Adapted from Reuters.com)

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