The Federal Reserve’s primary inflation measure showed a smaller-than-expected price increase in August, offering some relief to markets anxious about rising borrowing costs.
The personal consumption expenditures price index rose 0.3% on a seasonally adjusted monthly basis, putting the 12-month headline gain at 3.4%, below the 3.7% forecast from economists surveyed by Dow Jones.
Core PCE, which strips out volatile food and energy prices, climbed 0.2% for the month and 3.0% annually, compared with forecasts of 0.3% and 3.3% respectively.
The Bureau of Economic Analysis revised its methodology for measuring prices in legal services, software, computer accessories, and portfolio management, which contributed to the softer readings.
Those revisions lowered the core July PCE level by 0.36 percentage points, meaning the August figures reflect both changing prices and a changed measurement approach.
Stock market futures rose following the report, while Treasury yields fell and traders reduced their bets on an October rate hike, shifting expectations toward a December increase instead.
“This is good news for investors worried about the recent surge in bond yields, and it bolsters the case for not hiking in October,” said David Russell, global head of market strategy at TradeStation. “However, it’s also relatively old data at this point that doesn’t reflect this month’s surge in diesel prices.”
Energy costs were the primary driver of August’s price gains, with gasoline jumping 4.4%, transportation services rising 1.4%, and energy goods and services climbing 2.3% overall.
Despite the softer-than-expected reading, both headline and core PCE remain well above the Fed’s 2% target, keeping the pressure on policymakers to consider further action before the year ends.
“Even after major methodological revisions, PCE inflation is still running hot however you cut it,” said Sonu Varghese, global macro strategist at Carson Group. “The economy is running hot, policy remains easy, and the Fed’s challenge is figuring out how much restraint is needed. That’s a tailwind for stocks as we move into Q4.”
Personal income rose 0.2% in August, missing the 0.4% consensus estimate, while consumer spending increased 0.9%, slightly ahead of the 0.8% forecast.
“The PCE Inflation data – the Federal Reserve’s favorite – show no progress in August on inflation,” said Heather Long, chief economist at Navy Federal Credit Union. “And it’s inevitable that September will be higher. Meanwhile, American consumers are feeling the squeeze.”
Separately, the Commerce Department revised second-quarter GDP growth sharply higher to a 2.2% annualised rate, up from the prior estimate of 1.5%, reflecting stronger consumer and government spending as well as private investment.
Real final sales to private domestic purchasers, a closely watched measure of underlying demand, increased 4.6% in the second quarter, an upward revision of 0.4 percentage points.
New York Fed President John Williams helped temper expectations for an October hike a day before the data release, saying “there is no need for urgency, and we have time to gather more information” following the September rate decision.
Williams added that another hike “may be appropriate late this year,” reinforcing market pricing that has now firmly shifted the next expected increase to December.