The Commerce Department reported Friday that inflation approached the Federal Reserve's target in August, paving the way for future interest rate cuts.
The Personal Consumption Expenditures Price Index, a measure the Fed focuses on to measure the cost of goods and services in the U.S. economy, rose 0.1% during the month, bringing the 12-month inflation rate to 2.2%, down from 2.5% in July. The lowest since February 2021. The Fed targets inflation at 2% annually.
Economists surveyed by Dow Jones had expected all personal consumption expenditures items to rise 0.1% month over month and 2.3% from a year ago.
Excluding food and energy, the core personal consumption expenditures index rose 0.1% in August and was up 2.7% from a year ago, 0.1 percentage point higher than in July. Fed officials tend to focus more on fundamentals as a better gauge of long-term trends. Expectations were respectively 0.2% and 2.7% on a basic basis.
“All is quiet on the inflation front,” said Chris Larkin, managing director of e-commerce trading and investing at Morgan Stanley. “Add today's Personal Consumption Expenditures Price Index to the list of economic data landing in a good place. Inflation continues to keep its head low, and while economic growth may be slowing, there is no sign of it falling off a cliff.”
Although inflation figures indicate continued progress, personal spending and income figures were soft.
Personal income increased by 0.2% on a monthly basis while spending rose by 0.2%. Estimates of an increase were between 0.4% and 0.3%.
Stock market futures were positive after the report while Treasury yields were negative.
The readings come just over a week after the Federal Reserve cut its benchmark overnight borrowing rate by half a percentage point to a target range of 4.75%-5%.
The progress in August came despite continued pressure from housing-related costs, which increased 0.5% month-on-month in the biggest move since January. Overall service prices rose by 0.2% while goods prices decreased by 0.2%.
It was the first time the central bank had eased since March 2020 in the early days of the Covid pandemic, and was an unusually large action for a Fed that prefers to move 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 slowing. At their meeting last week, policymakers signaled the possibility of another half a percentage point in cuts this year and then a full point in cuts for 2025, although markets expect a more aggressive path.
